3. Consider the situation of firm A and firm B. Firm A is a U.S. MNC...

 

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3. Consider the situation of firm A and firm B. Firm A is a U.S. MNC and wants to borrow £30 million for 5 years. Firm B is a British MNC and wants to borrow $60 million for 5 years. The current exchange rate is $2.00/£. Their borrowing opportunities are shown in the table 1, both firms have AAA credit ratings. A B USD Table 1 $ $6% $7% Assume that the swap bank is quoting in table 2: Table 2 Bid Ask 6% 6.1% You are required to finish the following questions. £ £5% £4% Bid 4% pounds Ask 4.1% (1) Calculate the quality spread differential (QSD); (2 points) (2) Explain if there exist the swap opportunity for firm A and firm B; (4 points) (3) Show how firm A, firm B and the swap bank can practice the swap use the information given (you can either describe by words or illustrate by diagrams); (8 points) (4) Calculate the all-in-cost (AIC) of firm A, firm B and the swap bank. (6 points) 3. Consider the situation of firm A and firm B. Firm A is a U.S. MNC and wants to borrow £30 million for 5 years. Firm B is a British MNC and wants to borrow $60 million for 5 years. The current exchange rate is $2.00/£. Their borrowing opportunities are shown in the table 1, both firms have AAA credit ratings. A B USD Table 1 $ $6% $7% Assume that the swap bank is quoting in table 2: Table 2 Bid Ask 6% 6.1% You are required to finish the following questions. £ £5% £4% Bid 4% pounds Ask 4.1% (1) Calculate the quality spread differential (QSD); (2 points) (2) Explain if there exist the swap opportunity for firm A and firm B; (4 points) (3) Show how firm A, firm B and the swap bank can practice the swap use the information given (you can either describe by words or illustrate by diagrams); (8 points) (4) Calculate the all-in-cost (AIC) of firm A, firm B and the swap bank. (6 points)