Apple is a US-based multinational company and would like to borrow fixed-rate Japanese yen, whereas Toshiba...

 

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Apple is a US-based multinational company and would like to borrow fixed-rate Japanese yen, whereas Toshiba is a Japan-based multinational company and would like to borrow floating-rate US dollars, Apple can borrow fixed-rate yen at 3.4% or floating rate dollars at LIBOR +0.2%. Toshiba can borrow fixed- rate yen at 3.6% or floating-rate dollars at LIBOR +0.8%. 1) Provide possible explanations why Apple would like to borrow fixed-rate yen, while Toshiba would like to borrow floating-rate dollars. 2) In which market does each company have a comparative advantage and what is the maximum possible cost saving to Apple from engaging in a currency swap with Toshiba? 4) Construct a swap arrangement of yen and dollar that will enable the two firms to split the cost savings equally. If the credit rating for Apple is higher than Toshiba, how does this affect Apple's benefit from the swap in general? 5) Citi-bank has offered a swap arrangement to both companies with a fee of 0.1%. What is the benefit for the companies to accept the offer from Citi-bank, instead of engaging the swap directly? In this case, what would be their effective interest rate under a swap if they split the cost savings equally? 6) Is the rate for Apple truly fixed? Are swaps as risky as equivalent-sized loans for financial institutions? Why do Apple and Toshiba use Citi-bank and pay them 0.1%? Explain your answers. Apple is a US-based multinational company and would like to borrow fixed-rate Japanese yen, whereas Toshiba is a Japan-based multinational company and would like to borrow floating-rate US dollars, Apple can borrow fixed-rate yen at 3.4% or floating rate dollars at LIBOR +0.2%. Toshiba can borrow fixed- rate yen at 3.6% or floating-rate dollars at LIBOR +0.8%. 1) Provide possible explanations why Apple would like to borrow fixed-rate yen, while Toshiba would like to borrow floating-rate dollars. 2) In which market does each company have a comparative advantage and what is the maximum possible cost saving to Apple from engaging in a currency swap with Toshiba? 4) Construct a swap arrangement of yen and dollar that will enable the two firms to split the cost savings equally. If the credit rating for Apple is higher than Toshiba, how does this affect Apple's benefit from the swap in general? 5) Citi-bank has offered a swap arrangement to both companies with a fee of 0.1%. What is the benefit for the companies to accept the offer from Citi-bank, instead of engaging the swap directly? In this case, what would be their effective interest rate under a swap if they split the cost savings equally? 6) Is the rate for Apple truly fixed? Are swaps as risky as equivalent-sized loans for financial institutions? Why do Apple and Toshiba use Citi-bank and pay them 0.1%? Explain your answers.

Answer rating: 100% (QA)

1 Possible explanations for Apples preference to borrow fixedrate yen Apple may have a more conservative risk management approach and prefers fixedrat... View the full answer