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Company X wants to borrow $10,000,000 fixed for 5 years; company Y wants to borrow 5,000,000 fixed for 5 years. The exchange rate is $2
Company X wants to borrow $10,000,000 fixed for 5 years; company Y wants to borrow 5,000,000 fixed for 5 years. The exchange rate is $2 = 1 and is not expected to change over the next 5 years. Their external borrowing opportunities are: Borrowing Cost Borrowing Cost Company X $9% 10.4% SWAP BANK Company Y $11% 13% A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap. In order for X and Y to be interested, they can face no exchange rate risk What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y? O A = $10.50%; B = 12%. A = $10%; B = 13%. O A = $12%; B = 13%. A = 10.40%; B = $11%
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