Suppose Company A wants 5-year fixed rate dollar funding while Company B wants 5- year fixed rate Japanese yen funding. Company As direct borrowing all-in-cost is 9.50% p.a. in dollars and 7% p.a. in Japanese yen. Company Bs direct borrowing all-in-cost is 8.25% p.a. in dollars and 8% p.a. in Japanese yen.

Required:

(a) Refer to the quotes by a bank below and design a swap between the two companies involving the bank. Show, by means of diagrams, the yen rates the bank receives and pays, and the dollar rates the bank receives and pays.

Note: For all the swap quotes above, the bid rate is the fixed rate the bank pays to the fixed rate receiver, and the offer rate is the fixed rate that the bank receives from the fixed-rate payer.

(b) What is the maximum gain for all parties involved through this swap? What is the effective borrowing cost for each company? How much does each company save through the swap?

Currency Swaps Yen U.S.Dollar Bid Offer (%p.a.) 7.22 Bid Offer Term Term (%p.a) 7.18 (%p.a.) (%p.a.) 7.53 7.89 8.16 2 2 7.58 3 7.17 7.15 7.23 7.94 7.20 8.21 4 4 7.12 6.89 5 7.17 5 8.35 8.39 7 6.94 8.55 8.59 6.72 10 6.86 10 8.68 8.72