Company A wishes to borrow 1 million US dollars at a fixed rate of interest. Company B wishes to borrow the equivalent 100 million Japanese Yen at a fixed rate of interest (spot exchange rate 100JPY/USD). As it can be seen the amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following rates of interest, which have been adjusted to reflect the risk situations of the two companies:

	yen	Dollar
Company A	5.0%	9.6%
Company B	6.0%	10%

a) Identify an absolute advantage situation (if any), then calculate the quality spread and identify the comparative advantage of each of the companies.

b) Design a swap (mathematically using a table) that will net a bank, acting as intermediary (FI), 50 basis points per annum. The FI must take exchange rate risk in US$. Make the swap equally attractive to the other two companies.

c) Draw a swap diagram showing the cash flows and those benefits presented in b) (Remember to specify the currency at all times!).