Consider the following fixed borrowing rates available to Pepper Corp and to Truffles Corp in both the British pound (GBP) and the Euro (EUR):

	GBP rate	EUR rate
Pepper Corp	11.90%	18.40%
Truffles Corp	9.50%	13.00%

One firm has an absolute advantage in borrowing in both currencies, but each firm borrows at its comparative advantage and then enters into a swap with a financial intermediary.

Under the swap, the financial intermediary makes payments to the firms that each need to cover the loans borrowed at their comparative advantages.

In exchange, the financial intermediary requires payment at 17.90% p.a. from the firm that has a comparative advantage in borrowing the British pound, and it requires payment at 8.90% p.a. from the firm borrowing in Euro.

What is the net benefit to the intermediary from such a swap?

Select one:

a. This swap would be a net loss to the financial intermediary.

b. 1.90% p.a.

c. 1.50% p.a.

d. 3.00% p.a.

e. 9.00% p.a.

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