Company A, a French manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest for one year. Company B, a U.S. multinational firm, wishses to borrow euro ay a fixed rate of interest for one year. They have been quoted the following rates per annum:

Company A: Euro 8.6% U.S. Dollar: 5%

Company B: Euro 9% U.S. Dollar: 4.2%

a. design a swap that: (i)- will net a bank, acting as intermediary, 15% of QSD (quality spread differential) per annum in euro and 15% of the QDS in the U.S. dollars; and (ii)- will generate a gain of 35% QSD per annum for A and 35% of QSD for company B.

b. suppose that the notional value of swap is $145 millio and 100 million euros at the initial spot exchange rate of ($1.45/euro). Calculate gains (losses) for the intermediary bank if the exchange rate will be ($1.90/euro) one year from now. Explicitly show Bank;s gains or losses in each currency after one year.