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?

Multiple Choice

• 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

Alpha and Beta Companies can borrow for a five-year term at the following rates:

	Alpha		Beta
Moodys credit rating	Aa		Baa
Fixed-rate borrowing cost	10.5	%	12.0	%
Floating-rate borrowing cost	LIBOR		LIBOR + 1	%

Calculate the quality spread differential (QSD). (Enter your answers as a percent rounded to 2 decimal places.)