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 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR. USD Euro Bid Ask Bid Ask 8 % 8.1 % 6 % 6.1 % The firms external borrowing opportunities are: € borrowing $ borrowing A € 7 % $ 8 % B € 6 % $ 9 % Is there a mutually beneficial swap? Yes, Firm A swaps with the swap bank, $ at bid and € at ask. Firm B swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp. There is no mutually beneficial swap at these prices. Yes, Firm A swaps with the swap bank, $ at ask and € at bid. Firm B swaps with the swap bank, $ at bid and € at ask. Firms A and B would each save 90bp and the swap bank would earn 20bp. none of the options
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 $2.00 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR.
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Euro |
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Bid |
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Ask |
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Bid |
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Ask |
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8 |
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8.1 |
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6 |
% |
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6.1 |
% |
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The firms external borrowing opportunities are:
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€ borrowing |
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$ borrowing |
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A |
€ |
7 |
% |
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$ |
8 |
% |
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B |
€ |
6 |
% |
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$ |
9 |
% |
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Is there a mutually beneficial swap?
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Yes, Firm A swaps with the swap bank, $ at bid and € at ask. Firm B swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp. |
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There is no mutually beneficial swap at these prices. |
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Yes, Firm A swaps with the swap bank, $ at ask and € at bid. Firm B swaps with the swap bank, $ at bid and € at ask. Firms A and B would each save 90bp and the swap bank would earn 20bp. |
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none of the options |
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