Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow 5,000,000 fixed
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Question:
Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year. The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00 × (1.08)/£1.00 × (1.06) = $2.0377/£1. Their external borrowing opportunities are:
| $ Borrowing |
| £ Borrowing | ||||
| Cost |
| Cost | ||||
Company X | $ | 8 | % |
| £ | 7 | % |
Company Y | $ | 9 | % |
| £ | 6 | % |
| |||||||
A swap bank wants to design a profitable fixed-for-fixed currency swap. In order for X and Y to be interested, they can face no exchange rate risk.
What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?
Expert Answer:
a To calculate the arithmetic average return on ABC stock over the fiveyear period we sum up the ret... View the full answer
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