2 Companies A and B face the following interest rates: Company A 3% Company B x% UK pounds (fixed rate) US dollars (floating rate) LIBOR-0.25% LIBOR-0.5% (i) Assuming that A wants to borrow in British pounds at a fixed rate and B wants to borrow in US dollars at a floating rate, derive a lower or upper bound for x that allows these companies to enter into a profitable swap agreement. (ii) Assume now that x = 2.5%, design a swap that is equally at- tractive to both companies arranged by a financial intermediary that makes a profit of 0.05% from these operations. (iii) Assume now that x = 2.8%, describe the conditions under which a swap contract between A and B makes sense. Design a swap that is equally attractive to both companies without a financial intermediary.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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2 Companies A and B face the following interest rates:
Company A
3%
Company B
x%
UK pounds (fixed rate)
US dollars (floating rate) LIBOR-0.25% LIBOR-0.5%
(i) Assuming that A wants to borrow in British pounds at a fixed
rate and B wants to borrow in US dollars at a floating rate,
derive a lower or upper bound for x that allows these companies
to enter into a profitable swap agreement.
(ii) Assume now that x = 2.5%, design a swap that is equally at-
tractive to both companies arranged by a financial intermediary
that makes a profit of 0.05% from these operations.
(iii) Assume now that x = 2.8%, describe the conditions under which
a swap contract between A and B makes sense. Design a swap
that is equally attractive to both companies without a financial
intermediary.
Transcribed Image Text:2 Companies A and B face the following interest rates: Company A 3% Company B x% UK pounds (fixed rate) US dollars (floating rate) LIBOR-0.25% LIBOR-0.5% (i) Assuming that A wants to borrow in British pounds at a fixed rate and B wants to borrow in US dollars at a floating rate, derive a lower or upper bound for x that allows these companies to enter into a profitable swap agreement. (ii) Assume now that x = 2.5%, design a swap that is equally at- tractive to both companies arranged by a financial intermediary that makes a profit of 0.05% from these operations. (iii) Assume now that x = 2.8%, describe the conditions under which a swap contract between A and B makes sense. Design a swap that is equally attractive to both companies without a financial intermediary.
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