Consider Fixed-For-Fixed Currency Swap

question 53

Multiple Choice

Consider fixed-for-fixed currency swap.Firm A is a U.S.-based multinational.Firm B is a U.K.-based multinational.Firm A wants to finance a £2 million expansion in Great Britain.Firm B wants to finance a $4 million expansion in the U.S.The spot exchange rate is £1.00 = $2.00.Firm A can borrow dollars at 10 percent and pounds sterling at 12 percent.Firm B can borrow dollars at 9 percent and pounds sterling at 11 percent.Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk.

• A)There is no mutually beneficial swap that has neither party facing exchange rate risk.
• B)Firm A should borrow $4 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 8 percent in dollars to A.
• C)Firm A should borrow $2 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 4 million pounds and pays 8 percent in dollars to A.
• D)Firm A should borrow $4 million in dollars,pay 11 percent in pounds to Firm B,who in turn borrows 2 million pounds and pays 10 percent in dollars to A.

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Definitions:

Aggregate Supply Curve

A graph that shows the relationship between the overall price level in an economy and the total output (goods and services) that producers are willing to supply.

Aggregate Demand

The total demand for all goods and services in an economy at a given overall price level and in a given time period.

Real GDP

Gross Domestic Product adjusted for inflation, providing a more accurate measure of an economy's size and how it's growing over time.

Aggregate Demand Curve

The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels.