Suppose that Company A would like to borrow fixed-rate Swiss francs and Company B would like to borrow floating-rate dollars. Suppose the firms can borrow at the following market rates:

Dollar Rates

Swiss Franc Rates

Comp B.

5.8%

4.9%

Comp. A

5.0%

4.4%

Design a swap that is equally attractive to both Company A and B and provides the bank 10 bps and the swap dealer takes all the exchange rate risk.

(5 points) Suppose in part (a) the swap dealer will hedge the foreign currency risk using a series of forward contracts. What is the swap dealer concerned about in terms of foreign exchange risk? What position will it take in the forward contracts?

Question

Suppose that Company A would like to borrow fixed-rate Swiss francs and Company B would like to borrow floating-rate dollars. Suppose the firms can borrow at the following market rates:

	*Dollar Rates*	*Swiss Franc Rates*
*Comp B.*	5.8%	4.9%
*Comp. A*	5.0%	4.4%

Design a swap that is equally attractive to both Company A and B and provides the bank 10 bps and the swap dealer takes all the exchange rate risk.

(5 points) Suppose in part (a) the swap dealer will hedge the foreign currency risk using a series of forward contracts. What is the swap dealer concerned about in terms of foreign exchange risk? What position will it take in the forward contracts?

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Question

Suppose that Company A would like to borrow fixed-rate Swiss francs and Company B would like to borrow floating-rate dollars. Suppose the firms can borrow

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