Question: The table below shows the 5-year fixed-rate borrowing costs to Firm A and Firm B in US dollars (USD) and Australian dollars (AUD). Borrowing rates

The table below shows the 5-year fixed-rate borrowing costs to Firm A and Firm B in US dollars (USD) and Australian dollars (AUD).

Borrowing rates providing basis for currency swap.

	USD	AUD
Firm A	5.0%	7.5%
Firm B	7.0%	8.0%

Required: Assume that the amounts required by the two companies are roughly the same at the current exchange rate. Design a swap that will net a bank, acting as intermediary, 30 basis points per annum and that will appear equally attractive to both companies and ensure that all foreign exchange risk is assumed by the bank.

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