US Dollars	Swiss Francs
Firm LMN	10 pct.	7 pct.
Firm XYZ	8 pct.	6 pct.

The above borrowing rates represent the borrowing rates the firms can obtain for a five year fixed rate debt issue in U.S. dollars or Swiss francs. Suppose XYZ wishes to borrow Swiss francs and LMN wishes to borrow U.S. dollars. LMN demands a 10 pct cost of borrowing . First step is for XYZ to borrow $1000 at its 8 percent rate. Using a swap demonstrate, explain how the borrowing costs of each company could be reduced. Assume the spot exchange rate of 2 Swiss francs per dollar.