Question

The Treasurer for a large multinational firm based in the U.K. The firm is attempting to raise 100 million euros for 6 years to expand operations in Spain. With the credit crunch, borrowing rates have increased, even with your firm’s good credit. As a result, you find that you have two options:

1) Borrow pounds in the U.K. at 7% and convert them into 100 million euros (the spot rate for exchange is 1 euro = 0.9 pound). As your Spanish subsidiary generates euro revenues, you’ll have to convert them into pounds to pay the interest expense of the debt.

2) Borrow euros in Spain through your subsidiary at 6% (a rate that you suspect may have a premium built into it since you are a foreign company).

A swap bank hears of your borrowing needs and realizes that they have a Spanish client that is trying to launch a project in London that is roughly the size and duration of your expansion plans. This client has the following options:

1) Borrow euros in Spain at 5.5% and convert them into pounds.

2) Borrow pounds in the U.K. through its subsidiary at 7.75%.

The question is: How can the Swap Bank help both of these firms, and make a profit? Suggest a stream of cash flows that the Swap Bank could offer both parties to make all three entities (your firm, the Spanish firm, and the Swap Bank) better off. The Swap Bank does not want to charge any commissions, nor front-end fees, to earn its money (in other words, use another method to allow the Swap Bank to make a profit.)

Answer 1

availible optim baxmowa Ew_ boxou a powd 7.7. Spaiofio .5.54 Hokulties Satis retiuthey Initial ante. Wok multinatimal bontou 90 m m Pound from uok at the seate of 7:10 & transfer. Such loan to Spain multis natimal & Spain Mutinatimae tantec the same amount to it's uile Subsidamy this whole transactim is done by o swap banko spain firm will borrow at 6.5 foom Spain they I will transfer Sucn loomilimi Elro to UK Multinatimae & UK mult.. natim al will ansfer to Spain subsida1%

ihteest cashflowe Spanish subsidany of unih firm will Pas 5.5 Millim EW10_als into sost dov Uilha multinatimal 24:15.mult natinal will par samo to the third pauty from whom it has borrowed loan at the same time Uule Subsidaruz of slanish from will pay 6:3 Million Pound as interest to Spanish multinational o Spanish multinational Will Pay game amount to the third party to whom they have borrowed Repayment casinfrowi e Slanish subsideviy of custom Will Rarcey (100+5.5) - 1055 millim as interesit Principal toiviki firm o unsa firm will Repay the a loun to the party from whom they o nowe porrowed

at the same time wil. Subsidy of spanish fiom will pay 96.3 million pound (go+603) as an interest 4 evan repayment and spanish multinatinal will tranfer same amount to third Pauty from whom they have borrowed Carlied Net bent it's to Uk. multinatimaisa Gol -5.5010 Spanish subsidary. To con to Spanish multinatimal's - 7.75% - 70% U-lk. subsidane to 2018 total SWAP. Advantage due to 1.250%.

I hope my efforts will be fruitful to you....?