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Consider the following information: The German firm would like to borrow $31.25 million for five years to finance its operations at a U.S.- based plant,
Consider the following information: The German firm would like to borrow $31.25 million for five years to finance its operations at a U.S.- based plant, while the U.S. firm would like to issue a 5-year euro 25 million loan/bond to finance its new subsidiary in Frankfurt, Germany. An investment banker suggested the firms that they could benefit by borrowing in the market where they have a comparative advantage and then agreeing on a fixed-for- fixed currency swap to revert to the currency they desired for their loan. Assume that both firms have the same credit ratings, so they'll equally share the potential benefits from the swap. a. Show the total benefits (total pie) to be shared by both firms with the swap than without the swap Also, show the benefit share of each firm with the swap. b. what annual interest rate each firm will pay with the swap than without the swap? c. Fill in the information below about the exchange of principal and interest payments (S and euro) with the Swap
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