Groene Stad Ltd., a South African company specialized in environment-friendly infrastructure engineering, has decided to participate in a development project in Brisbane, Australia. Groene Stad is expected to raise a sum of AUD 5,000,000 in the credit market to finance the project. The principal amount of the loan should be repaid in four years, with yearly interest payments. The company has hitherto been mostly active on a national scale, and faces more favorable credit terms in the South African market than in the Australian market, for loans in the respective currencies. The lowest rates for loans denominated in AUD and in ZAR are respectively 6.5% and 6%.

An Australian MNC must borrow ZAR 50,000,000 to finance the capital expenditure of its South African subsidiaries over a four-year time-period. The lowest rates faced by this MNC for loans denominated in AUD and in ZAR are respectively 5% and 7%, and the spot exchange rate is AUD 1.00/ZAR 10.00 over the duration of the swaps.

(a) (2 points) Calculate the Quality Spread Differential (QSD).
(b) Set up a currency swap (involving a swap bank) that will benefit each counterparty. The total benefits from the swap are divided according to the allocation ratio of Groene Stad: the Australian MNC: Swap Bank = 2:2:1. Note that a currency swap can be viewed as a combination of two interest rate swaps.
(i) (2 points) What is the effective borrowing cost faced by of Groene Stad after entering into the swap contract?
(ii) (2 points) What is the effective borrowing cost faced by the Australian MNC after entering into the swap contract?
(iii) (3 points) What are the swap banks ask price and bid price on the four-year AUD interest rate swap against LIBOR?
(vi) (3 points) What are the swap banks ask price and bid price on the four-year ZAR interest rate swap against LIBOR?