Given the following:

US Dollars Swiss Francs

Firm LMN 11 pct. 7 pct.

Firm XYZ 7 pct. 6 pct.

The above borrowing rates represent the borrowing rates the firms can obtain for a five year fixed rate debt issue in U.S. dollars or Swiss francs. Suppose XYZ wishes to borrow Swiss francs and LMN wishes to borrow U.S. dollars. LMN demands a 11 pct cost of borrowing . First step is for XYZ to borrow $1000 at its 7 percent rate. Using a swap demonstrate, explain how the borrowing costs of each company could be reduced. Assume the spot exchange rate of 2 Swiss francs per dollar.

Please explain how you found the answer. (i.e. do not copy directly from the solutions manual) Thanks!