Company X wants to borrow $10,000,000 floating for 5 years; Company Y wants to borrow 5,000,000 fixed for 5 years. The exchange rate is $2 = 1. Their external borrowing opportunities are:

	$ Borrowing				Borrowing
	Cost				Cost
Company X	$	10	%			10.5	%
Company Y	$	12	%			13	%

A swap bank proposes the following swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80 percent; in exchange the swap bank will pay to company X interest payments on 5,000,000 at a fixed rate of 10.5 percent. Y will pay the swap bank interest payments on 5,000,000 at a fixed rate of 12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of $12 percent. Principal amounts will be exchanged and re-exchanged, respectively, at inception and maturity. If company X takes on the swap, what external action should it engage in?

the answer is one of the following:

It should borrow 5,000,000 at 12.80 percent for five years; translate pounds to dollars at the spot rate.

It should borrow 5,000,000 at 10.50 percent for five years; translate pounds to dollars at the spot rate.

It should borrow $10,000,000 at $12 percent.

It should borrow $10,000,000 at $10 percent.