TNT, a Netherlands firm wants to finance an AUD 52 million expansion in Australia. The firm could raise EUR 40 million in the Euro capital markets at 6% while its cost of borrowing in Australia would be 9%. A Swap bank has arranged a currency swap with Rip Curl that is looking to raise EUR 40 million. Rip Curl faces a borrowing rate of 8% on $52 million in Australia and 7% in the Eurobond market. The Swap bank quotes dollar swaps at 8.00% 8.15% and euro swaps at 6.00% 6.10%. The spot rate is 1.3 AUD = 1 EUR.

a. What will the benefit (in %) of the swap be for the swap bank? b. What will the benefit (in %) of the swap be for TNT? a. What will the benefit (in %) of the swap be for Rip Curl? How does the theory of comparative advantage relate to the swap market? d. What is the net gain in AUD for the swap bank? e. Which firm has comparative advantage borrowing in AUD?f. How does the theory of comparative advantage relate to the swap market? g. Why might TNT face such an unfavorable borrowing rate in AUD?