Come up with a swap (exchange of interest and principal) for parties A and B who have the following borrowing opportunities.

The current exchange rate is $1.60 = 1.00. Company "A" is in Milan, Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S. firm that wants to borrow 625,000 for 5 years at a fixed rate of interest. You are a swap dealer.

(1) Compute the QSD. If you are a swap bank, can you make A and B a swap offer? If yes, how do you distribute the profit? (7 pts)

(2) Describe the cash flows among A, B, and the swap bank. (15 points)

(Hint: you also need two outside lenders and the FX market to complete the diagram)

(3) Show the quote of swap (5 points)