Question: A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow 2,000,000 for 3

A is a U.S.-based MNC with AAA credit; B is an Italian

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow 2,000,000 for 3 years and B wants to borrow $3,000,000 for 3 years. The spot exchange rate is $3.00 = 2.00, a swap bank makes the following quotes for 3- year swaps and AAA-rated firms: USD Bid Ask 6.00% 6.50% The firm's external borrowing opportunities are: borrowing 8% 7% Euro Bid 7.00% A B Ask 5.50% 6.00% Ask 7.50% $ borrowing 6% 7% a. Compute the quality spread differential (QSD). (2 points) b. Present a spreadsheet that shows the year-by-year cash flows between the swap bank and the two firms that are mutually beneficial to each party and meets their financing needs. Show all the interest rate payments and receipts. (6 points) c. Assume that after one year, the swap bank updated the quotes: USD Euro Bid Bid 6.00% Ask 6.50% Assuming that exchange rate is now $1.60/, show how much the swap is valued to each firm. (rounded to the ones place) (6 points)

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