Consider the dollar$-$ and euro$-$based borrowing opportunities of companies A and B$.$

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\mathrm{.}00=1\mathrm{.}00.$ Suppose the firms agree to borrow in their home currencies and

then engage in a swap. Is this mutually beneficial swap equally fair to both parties? Assume

there is no swap bank and the two firms interact directly.

A Yes, A will be better off by $1$ percent on $1m$; B by $1$ percent on $$2m$ and $$2\mathrm{.}00=$

$1\mathrm{.}00.$

B $,$ Yes, $QSD=[7\%-6\%$$$\frac{2\mathrm{.}00}{}1\mathrm{.}00]-($$$8\%-$$$9\%)=$$$2\%+$$$1\%=$$$3\%.$

C No$,$ company A borrows at $6$ percent in euro but company B borrows at $8$ percent in

dollars.

D No$,$ company A saves $1$ percent in euro but company B saves only $1$ percent in dollars

when the spot exchange rate is $$2\mathrm{.}00=1\mathrm{.}00-A$ is twice as better off as $B.$

Explain all steps and why the other answer choices are incorrect. How would the answer change if both firms did not agree to borrow in their home currencies before engaging in the swap?