Question

Consider the following information:

Firm                                   U.S. $ (USD)                                    AUS $ (AUD)
General Electric (GE)       9%                                                    7.5%      
Qantas Airways               11%                                                  8.5%

The Qantas would like to borrow $25 million for five years in US, while GE would like to issue a 5-year A$31.25 million bond in Australia. A swap dealer suggested to the firms that they could benefit by borrowing in the market where they have a comparative advantage and then agreeing on a fixed-for-fixed currency swap to revert to the currency they desired for their loan. Assume that both firms will equally share the potential benefits from the swap. What annual interest rate each firm will pay with the swap?

		7% AUD for GE, 11% USD for Qantas
		7% AUD for GE, 10.5% USD for Qantas
		7.5% AUD for GE, 10.5% USD for Qantas
		7.5% AUD for GE, 11% USD for Qantas

Answer 1