Company X Wants to Borrow $10,000,000 Floating for 1 Year;

question 33

Multiple Choice

Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year.The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00 × (1.08) /£1.00 × (1.06) = $2.0377/£1.Their external borrowing opportunities are: $$\begin{array} { c c c } & \text { \$Borrowing } & \text { £Borrowing } \\ & \text { Cost } & \text { Cost } \\\text { Compary X }& \$ 8 \% & £ 7 \% \\\text { Compary Y } & \$ 9 \% & £ G \%\end{array}$$ 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 = £7%; B = $9%.
• B)A = $8%; B = £6%.
• C)A = $7%; B = £7%.
• D)A = $8%; B = £8%.

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