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American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of
American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rates. The following interest rates are listed adjusted for taxes:
| Yen | Dollars |
Company X | 6.0% | 9.10 % |
Company Y | 5.5% | 11.20 % |
Create a swap that will net a bank 40 basis points per annum. Make sure the swap is equally attractive to both companies and foreign exchange risk is assumed by the bank. Explain.
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