Question
Consider fixed for fixed currency swap. The Dow corporation is a U.S.-based multinational. The Jones corporation is a U.K.-based multinational. Dow wants to finance a
Consider fixed for fixed currency swap. The Dow corporation is a U.S.-based multinational. The Jones corporation is a U.K.-based multinational. Dow wants to finance a 2 million expansion in Great Britain. Jones wants to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $1.75. Dow can borrow dollars at $10% and pounds sterling at 12%. Jones can borrow dollars at 9% and pounds sterling at 10%. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.
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