Question

1. New Zealand Company WoolSmith is buying an Australian ranch and wants to borrow 30M in the AUD fixed interest rate market to pay for it over three years. Australian Company TinCo is buying a New Zealand mine for 37.5M NZDs and wants to borrow this amount in the NZD fixed rate market for three years. The spot exchange rate is .80 AUDs per NZD (or 1.25 NZDs per AUD).

The borrowing terms confronted by each company are below. Each company wants to borrow for three years. The terms would be the fixed interest rate payment on the first and second annual anniversaries of the loan then the principal plus final interest payment at the end of year three. The preferred borrowing “habitats” for WoolSmith and TinCo are in yellow in the table.

	3-year Fixed Rate NZDs	3-year Fixed Rate AUDs
WoolSmith	7%	9%
TinCo	10%	10.5%

You are a swap specialist at an Australian Investment Bank.

(a) Can you work out a currency loan swap agreement between these two companies that will benefit them both? Show your work.

The interbank interest rates currently available to the I-bank for structuring forward exchange rate contracts are below.

Interbank Borrowing Rates
Maturity	NZDs	AUDs
1 year	5%	6%
2 year	5%	6%
3 year	5%	6%

Answer 1

Well I am not sure about this question but as i have taken it so i can give my opinion may be it can be helpful.

As i Can see it that Wool smith is getting better terms in both the cases. But you can see that there is differential in between interest rate terms that is 3% in NZD and 1.5% in AUD

in My opinion wool smith should raise the money in NZD @7% and should give the whole money to the tin co @7%

and tinco. can raise the money in AUD @10.5% and should give that money to the wool smith @8%

here wool smith will get the money @8% lower than the 9% saving 1%

and tinco. would receive at cost of 7% + 10.5 - 8% = 9.5% which is less than the 10% saving 0.5%

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