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Suppose that Dow Chemical is looking to hedge some of its euro exposure by borrowing in euros. At the same time, Michelin (a French tire
- Suppose that Dow Chemical is looking to hedge some of its euro exposure by borrowing in euros. At the same time, Michelin (a French tire manufacturer) is seeking dollars to finance additional investment in the US. Both want the equivalent of $100m. Dow Chemical prefers to borrow floating rate euros, and Michelin fixed rate dollars. Dow Chemical can borrow floating rate at LIBOR + 0.4% vs Michelin s cost of borrowing floating rate euros of LIBOR + 0.2%. Dows cost of borrowing dollars is 8% versus Michelin 8.5%. (Spot rate is $1.2/)
- What do you recommend the two companies to do in order to reduce the costs? Calculate the savings for each company in currency form (first answer for Dow and second for Michelin)
- 2. Draw the diagram
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