Question
Two companies are offered the following interest rates: PINE Corporation OAK Corporation Australian Dollars (fixed rate) 4.1% p.a. 4.9% p.a. Swedish Krona (fixed rate) 5.9%
Two companies are offered the following interest rates:
PINE Corporation | OAK Corporation | |
Australian Dollars (fixed rate) | 4.1% p.a. | 4.9% p.a. |
Swedish Krona (fixed rate) | 5.9% p.a. | 6.1% p.a. |
A financial institution is planning to arrange a swap and requires a 20 basis point spread. If the swap is equally attractive to both companies, which one of the following statements is most accurate?
A) The comparative advantage is 0.40%.
B) None of the other answer choices are correct.
C) OAK has a comparative advantage in AUD rates.
D) By engaging in the currency swap, each party will improve their borrowing rate by 0.30%.
E) The currency swap will allow PINE to gain access to OAKs comparatively better SEK (Swedish Krona) rates.
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