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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: 8% Bid: 6%

Ask: 8.1% Ask 6.1%

The firms external borrowing opportunities are:

Euro borrowing | USD Borrowing

a. 7% (euro) 8%(usd)

b. 6% (euro) 9%(usd)

How many basis points (bp) can firms A and B each save by venturing info currency swaps?

How many bp will the swap bank earn?

 

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Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M91796445

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