Question

4 pts Question 11 Consider the dollar- and euro-based borrowing opportunities of companies A and B € Borrowing $Borrowing Firm $9% €7% A $99% €6% B A is a U.S-based MNC with AAA credit: B is an Italian firm with AAA credit. Firm A wants to borrow 1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by CIP as $2.00x(1.09)/1.00x(1.06)-$2.3108/1. Is there a mutually beneficial swap? Yes, QSD [E7 % -6% )- ($ 99% - $ 99 % )x€1.00/$2.00- 1 %| Yes, QSD 1 % -(7 %-6 % ) - ( 9 9% -9 % ) - 1 % - ( 0 % ) - 1 % No, QSD 0 Yes OSD (7% -€6 %lx $200/E1.00-ico%co t2 tnet

Answer 1

Borrowing of firm A - firm B - (Borrowing in $ of firm A - Borrowing in $ for firm B)

Option , Yes , QSD = 1% = (7%- 6%) - (9% -9%) = 1% - (0%) =1%