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:

Double Coincidence of Wants

A situation in barter economies where two parties each hold an item the other wants, allowing them to exchange goods directly.

Specialization of Labor

A process in which individuals or groups of workers concentrate on specific tasks, aimed at increasing efficiency and output.

Transactions Costs

Expenses incurred when buying or selling goods and services, including costs beyond the price of the product, such as time, effort, and fees.

Savings and Loan Debacle

A financial crisis in the 1980s and 1990s involving the collapse of savings and loan associations due to risky business practices and regulatory failures.