Question: 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

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)

1) How many basis points (bp) can firms A and B each save by entering into currency swaps?

2) How many bp will the swap bank earn? Please show work.

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