Question

Firm X wishes to borrow U.S. dollars at a fixed rate of interest. Firm Y wishes...

Firm X wishes to borrow U.S. dollars at a fixed rate of interest. Firm Y wishes to borrow Japanese yen at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies have been quoted the following interest rates, which have been adjusted for the impact of taxes:

JPY

USD

Firm X:

5.0%

9.6%

Firm Y:

6.5%

10.0%
  1. Which company has a comparative advantage in borrowing JPY and in borrowing USD?
  2. Design a swap that will net a bank, acting as intermediary, 50 basis points per annum. Make the swap equally attractive to the two companies with all foreign exchange risk being assumed by the bank. Show your calculations as you illustrate the transaction.
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Answer #1

ANSWER IN THE IMAGE. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

When a firm has an advantage in both floating and fixed annual rate, it is said to have a Comparative advantage then compared to another firm.

Otherwise, it is said to have an absolute advantage.

Here firm X has a Comparative advantage.

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