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The current spot exchange rate is $2/1. A U.S. company wants to fund a 5 million U.K. investment with one-year euro commercial paper. A

 

The current spot exchange rate is $2/1. A U.S. company wants to fund a 5 million U.K. investment with one-year euro commercial paper. A U.K. company wants to fund a $10 million U.S. investment with one- year U.S. dollar commercial paper. These companies' respective borrowing costs are summarized in the following table. What must be the values of A and B in the diagram for the U.S. and U.K. companies to be interested in a currency swap? Assume for simplicity that there is no bid-ask spread (that is, the swap bank does not earn a profit) and that the forward rate is $2.019/1. U.S COMPANY - BORROWING COST(USD) = 8% U.S COMPANY - BORROWING COST(U.K) = 9% U.K COMPANY - BORROWING COST(USD) = 10% UK COMPANY - BORROWING COST(UK) = 7% Multiple chpice A = $8%; B = 7%. A = 7%; B = $8%. A = $8%; B = 9%. A = 9%; B = $10%.

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