Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Consider the dollar- and euro-based borrowing opportunities of companies A and B. B borrowing $ borrowing 7% $8% 6% $9% A is a U.S.-based MNC
Consider the dollar- and euro-based borrowing opportunities of companies A and B. B borrowing $ borrowing 7% $8% 6% $9% A is a U.S.-based MNC with AAA credit: B is an Italian firm with AAA credit. Firm A wants to borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 1.08) $2.0377 $2.00 = 1.00 and the one-year forward rate is given by IRP as: 1.00 (1.06) 1.00 Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties? $8 $89 A B 6 6% Debt service expressed as a percentage of 2m = Sim Yes, QSD - (7% - 6% * $2.00/1.00 - ($8% - $9%) - $2% + $1% - $3% No, company A borrows at 6% in euro but company B borrows at 8% in dollars Yes. A will be better off by 1% on 1m; B by 1% on $2m and $2.00 - 1.00 No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 - 1.00-A is twice as better off as B
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started