Company A can borrow fixed-rate dollars at 3% or Euros as 6%. Company B can borrow dollars at 4% or Euros at 5%.

If these companies were to enter into a swap agreement to lower their costs of borrowing, answer the following questions:

(Show calculations to receive credit)

a. Which company would borrow dollars? Why?

b. Which company would borrow Euros? Why?

c. How much in total could they save using a swap?

d. If firm A receives all the swap benefit as savings, demonstrate how these companies would use a swap to lower their cost of debt, by creating an example using the numbers above.