There are two companies, A (US) and B (Germany). Company A is looking to hedge some...
There are two companies, A (US) and B (Germany). Company A is
looking to hedge
some of its Euro exposure by borrowing Euros. And company B is
seeking dollars to
finance some projects in the US. Both companies want the equivalent
of 100$ millions.
In order to improve their borrowing conditions they decide to
borrow in their own
currencies and then swap the debt-service obligations. Current spot
rate of $1.4/€, and
both companies want to borrow at fixed rate. Assume next
figures:
- Company A is paying 6 million $/year of interest rate.
- Company A can issue euro-denominated debt at 7.5%.
- Company B is paying 4.71 Million €/year of interest rate.
- Company B can issue dollar-denominated debt at 7.3%.
a) Which is the net profit of SWAP for each company?
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