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 five years and B wants to borrow $2,000,000 for five years. The spot exchange rate is $2.00 = 1.00, a swap bank makes the following quotes for 5-year swaps for AAA-rated firms against USD LIBOR.

	USD								Euro
	Bid				Ask				Bid				Ask
	4.00%				4.20%				1.80%				1.90%

The firms' external borrowing opportunities are

	borrowing				$ borrowing
A		2.7%			$	4.0%
B		1.8%			$	5.0%

Is there a mutually beneficial swap?

Group of answer choices

None of the options are correct.

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 80bp and the swap bank would earn 30bp.

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 80bp and the swap bank would earn 30bp.