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Consider the dollar- and euro-based borrowing opportunities of companies A and B. A B $ borrowing borrowing 8% 9% 7% 6% A is a U.S.-based
Consider the dollar- and euro-based borrowing opportunities of companies A and B. A B $ borrowing borrowing 8% 9% 7% 6% A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = 1.00 and the one-year forward rate is given by IRP as $2.00 x (1.08) / 1.00 (1.06) = $2.0377/1. Is there a mutually beneficial swap? A) No, Savings = 0 B) Yes, Savings = 2% = (7% -6%) - (8% -9%) = 1% - (-1%) C) Yes, Savings = [7% - 6%] $2.00/1.00 - ($8% - $9%) = $2% + $1% = $3% D) Yes, Savings = [7% - 6%] - ($8% - $9%) 1.00/$2.00 = 1%% More
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