Question
Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based multinational. Firm A wants to finance a 2 million expansion
Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based multinational. Firm A wants to finance a 2 million expansion in Great Britain. Firm B wants to finance a $4 million expansion in the U.S. The spot exchange rate is 1.00 = $2.00. Firm A can borrow dollars at $10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds sterling at 11%. Which of the following swaps is beneficial both party and meets their financing needs? In this swap, neither party should face exchange rate risk.
a. | Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 8% in dollars to A | |
b. | Firm A should borrow $2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4 million pounds and pays 8% in dollars to A | |
c. | Firm A should borrow $4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 10% in dollars to A | |
d. | There is no such a swap that has neither party facing exchange rate risk |
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