Question
Two MNCs have mirror-image financing needs for their foreign direct investments: they need to borrow money for 8 years. The amount of borrowing is $2,900,000
Two MNCs have mirror-image financing needs for their foreign direct investments: they need to borrow money for 8 years. The amount of borrowing is $2,900,000 or the equivalent amount at the current spot rate of $1.3272/. Both MNCs, despite of the same credit worthiness, are not well known in the international bond market, and thus pay higher interest rate for the foreign currency borrowing. The U.S. MNC pays 7% per annum to borrow euro, whereas the normal borrowing rate for firms of equivalent risk is 6% per annum. The EU MNC pays 9% per annum for dollar borrowing, whereas the normal dollar borrowing cost is 8% per annum for firms of equivalent risk. The 8-year swaps quotes are: USD: 8%-8.1% and EUR: 6%-6.1%.
(1) Summarize the interest payments resulting from the currency swap for the U.S. MNC
(2) Summarize the interest payments resulting from the currency swap for the EU MNC
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