Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to

Question:

Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.5% or floating-rate dollars at LIBOR + 0.25%. KDB can borrow fixed-rate yen at 4.9% or floating-rate dollars at LIBOR + 0.8%.

a. What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB?

b. Assuming a notional principal equivalent to $125 million and a current exchange rate of ¥105/$, what do these possible cost savings translate into in yen terms?

c. Redo parts a and b assuming that the parties use Bank of America, which charges a fee of 8 basis points to arrange the swap.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...