A US-Based Corporation Wants to Raise Fixed-Rate Dollar Financing

question 4

Multiple Choice

A US-based corporation wants to raise fixed-rate dollar financing.It finds it can borrow fixed in USD at 6% per annum.It can also borrow fixed in JPY at 2% per annum.It can enter into a USD-JPY currency swap in which 2% fixed JPY interest rates are exchanged for USD Libor.Lastly,the company can enter into a USD plain vanilla fixed-vs-Libor interest rate swap with a fixed rate of 5.75%.Given this information,the company's best option is to

• A)Raise USD fixed rate financing directly.
• B)Raise USD floating rate financing at Libor plus 25 basis points and swap into fixed.
• C)Raise fixed-rate JPY financing and leave it unhedged (i.e. ,do not enter into any swaps).
• D)Raise JPY fixed rate financing,swap into USD fixed using a currency swap and an interest-rate swap.

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Definitions:

Residual Income

The amount of income that an individual or company retains after accounting for all operating expenses and cost of capital.

Operating Assets

Assets that are used by a company in its daily operations to generate revenue, excluding any investment or non-operational assets.

Net Operating Income

The profit derived from a company's regular business activities, excluding deductions of interest and taxes.

Return On Investment

A performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.