Question: Hello - I need help with this problem - Thanks in advance A treasurer for a large multinational firm based in the UK. The firm
Hello - I need help with this problem - Thanks in advance
A treasurer for a large multinational firm based in the UK. The firm is attempting to raise 100 million euros for 6 years to expand operations in Spain. With the credit crunch, borrowing rates have increased, even with your firm's good credit. As a result, you find that you have two options:
1)Borrow pounds in the U.K. at 7% and convert them into 100 million euros (the spot rate for exchange is 1 euro = 0.9 pound). As your Spanish subsidiary generates euro revenues, you'll have to convert them into pounds to pay the interest expense of the debt.
2)Borrow euros in Spain through your subsidiary at 6% (a rate that you suspect may have a premium built into it since you are a foreign company).
A swap bank hears of your borrowing needs and realizes that they have a Spanish client that is trying to launch a project in London that is roughly the size and duration of your expansion plans. This client has the following options:
1)Borrow euros in Spain at 5.5% and convert them into pounds.
2)Borrow pounds in the U.K. through its subsidiary at 7.75%.
How can the Swap Bank help both of these firms, and make a profit? Suggest a stream of cash flows that the Swap Bank could offer both parties to make all three entities (your firm, the Spanish firm, and the Swap Bank) better off. The Swap Bank does not want to charge any commissions, nor front-end fees, to earn its money (in other words, use another method to allow the Swap Bank to make a profit.)
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