Bombardier, the well$-$known Canadian company, is looking for e$10$ million to fi$-$

nance capital expenditures in France to supply rolling stock to the Paris m $$etro$.$

Bombardier $($FR$)$ is the French arm of Bombardier$$s operations. At the current ex$-$

change rate of $$2\mathrm{.}00/$e$,$ Bombardier could issue $$20$ million in three$-$year bonds in

Toronto at a fixed interest rate of $7$ percent. Alternatively, Bombardier could issue

e$10$ million in three$-$year bonds in Paris, also at a fixed interest rate of $7$ percent.

Meanwhile, Danone, a French multinational food$-$products corporation, needs $$20$

million for its investments in a Qu $$ebec cheese factory operated by Danone $($Canada$).$

Danone can issue e$10$ million in three$-$year bonds in Paris at a fixed rate of $6$ percent

or a $ $20$ million three$-$year bond issue $($a Eurobond issue$),$ also in Paris, at a fixed

rate of $8$ percent.

Both Bombardier and Danone are clients of the Mid$-$Atlantic Swap Bank. Mid$-$

Atlantic quotes three$-$year dollar interest swaps at $7\mathrm{.}00-7\mathrm{.}15$ and three$-$year euro

$($e$)$ interest swaps at $6\mathrm{.}00-6\mathrm{.}10$ against dollar LIBOR flat.

$($a$)$ Propose a foreign exchange swap that is beneficial to Bombardier, Danone and

Mid$-$Atlantic;

$($b$)$ Identify the rates of interest and currency denomination of the flows to and

from the swap bank. Ensure that there is something in it for the Mid$-$Atlantic

Swap Bank.

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