Question

Firm A is a U.S. MNC who wants to finance a pound denominated asset in England, and therefore wants to borrow 40 million pounds for 5 years. A can borrow pounds at 6% annual rate and borrow dollar at 2% annual rate.

Firm B is a British MNC who wants to finance a dollar denominated asset, and therefore wants to borrow 60 million dollars for 5 years. B can borrow dollars at 3% and borrow pounds at 4% annual rate.

Assume 1 pound=1.5 dollar.

Establish currency swap assuming a swap bank involved in the deal and its quotation as follows. What is the cost for A and B after the swap? Profits to swap bank and cost savings for A and B?

	bid	ask
Pound	4.0%	4.5%
Dollar	2.0%	2.5%

Answer 1

Profit to A = 1.5%

Profit to B = 0.5%

Profit to Bank = 1%