Background:

Wools is a company that has declined to 30% of its profit, its credit rating received a downgrade from AA to BBB and decided against issuing bonds.

The CEO decided to borrow funds. Bank as their lender wanted to give them floating rate loans due to their credit rating. Wools preferred fixed-rate loans for certainty While another company, Bright Corp. who had an A credit rating preferred the floating rate.

Wools had $50 million funds to invest, which would be needed in 3 months.

CEO received quotations from 3 banks in the US.

All banks offer a rate of 6% on $50 million dollars.

the day count conventions quoted were different because some of the banks were of foreign banks but had operations in the U.S.

Question:

Holding transaction costs, taxation and other factors constant, which bank(s) will provide better interest on the short term deposit?

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Please answer this question completely and thoroughly and focus on;

-Interest rate and factors that might affect them

-Exchange rate and factors that might affect them

-BOP position, was important to understand whether a country's currency would appreciate or depreciate

*here I present you the interest rate forecasts and bank interest calculation method

Thank You!

Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2% Days Used 28 Practice Bank 1 Bank 2 Bank 3 Day Count in Period Exact Number of Days Exact Number of Days Assumed 30 Days/Month Days/Year 360 365 360 28 30 Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2% Days Used 28 Practice Bank 1 Bank 2 Bank 3 Day Count in Period Exact Number of Days Exact Number of Days Assumed 30 Days/Month Days/Year 360 365 360 28 30