Consider the situation of firm A and firm B. The current exchange rate is $2.00/ Firm A is a U.S. MNC and wants to borrow 30 million for 2 years. Firm B is a British MNC and wants to borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA credit ratings.

$A$6%5%B$7%4%

The IRP 1-year and 2-year forward exchange rates are

F

1

($

)=$2.00(1.06)

1.00(1.04)

=$2.0385

1.00

F1($)=$2.00(1.06)1.00(1.04)=$2.03851.00

F

2

($)=

$2.00(1.06)

2

1.00(1.04)

2

=$2.0777

1.00

F2($)=$2.00(1.06)21.00(1.04)2=$2.07771.00

USDpoundsBidAskBidAsk6%6.1%4%4.1%Explain how this opportunity affects which swap firm B will be willing to participate in.