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

question 42

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.
Company X

• A)is probably British.
• B)is probably American.
• C)has a comparative advantage in borrowing pounds.
• D)is probably British,and has a comparative advantage in borrowing pounds.

---

Definitions:

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a business model in which companies integrate social and environmental concerns in their operations and interactions with their stakeholders.

Enough Power

Having adequate influence, authority, or resources to achieve specific goals or exert control in a given context.

Government Force

The use of governmental power and authority to enforce laws, regulations, or directives.

Corporate Social Responsibility

A business model that helps a company be socially accountable to itself, its stakeholders, and the public, focusing on ethical, environmental, and philanthropic considerations.