Company A, a French manufacturer, desires to invest in U.S. dollars at a fixed rate of interest for one

year. Company B, a U.S. multinational, wishes to invest in euro at a fixed rate of interest for one year. They

have been quoted the following rates per annum (adjusted for differential tax effects):

Company Euro U.S. Dollar

Company A 10.6% 6.0%

Company B 9.6% 6.2%

a) Design a swap that will net a bank, acting as intermediary, 30% of QSD (quality spread differential) per

annum and that will generate a gain of 0% of QSD per annum for A and 70% of QSD for company B.

Assume that A and B agree to pass through all of their initial cash inflows generated from their investment

to the bank.

QSD:________________________

b) Suppose that the notional value of swap is $12.5 million and 10 million at the initial spot exchange rate of

So = $1.25/. Calculate gains (losses) for the intermediary bank if the exchange rate will be

S1 = $1.35/ one year from now.