ABC Corp. has not tapped the Deutsche Mark (DM) public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower, which it can be at LIBOR + 1%. DEF Corp. strongly prefers fixed-rate DM debt, but it must pay 1.5% more than the 6.25% coupon that ABC's DM notes would carry. DEF, however, can obtain Eurodollars at LIBOR + 0.5%.

What is the maximum possible cost savings to ABC from engaging in a currency swap with DEF (i.e. assuming all cost savings go to ABC)?

Select one:

a. 1%

b. 2%

c. 75%

d. 1.25%

e. 6.25%