Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 92

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are $$\begin{array} { c c c } & \text { \$Bortowing } & \text { £ Borrowing } \\& \text { Cost } & \text { Cost } \\\text { Compary X } & \$ 10 \% & £ 10.5 \% \\\text { Compary Y } & \$ 12 \% & £ 13 \%\end{array}$$ A swap bank wants to design a profitable interest-only fixed-for-fixed currency swap.In order for X and Y to be interested,they can face no exchange rate risk. What must the values of A and B in the graph shown above be in order for the swap to be of interest to firms X and Y?

• A)A = $10.50%; B = £12%.
• B)A = $10%; B = £13%.
• C)A = $12%; B = £13%.
• D)A = £10.50%; B = $12%.

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Definitions:

Money Supply

The complete sum of available financial resources in an economy, including cash, coins, and the funds available in checking and savings accounts, at a particular instant.

Inflationary Tendencies

The general tendencies or trends towards increasing prices and diminishing purchasing power over time within an economy.

Federal Reserve

The central banking system of the United States, responsible for monetary policy, regulation of financial institutions, and ensuring stability of the financial system.

Recovery

Phase of business cycle during which real GDP increases from trough level to level of previous peak.