A Is a US-Based MNC with AAA Credit; B Is an Italian Firm

question 47

Multiple Choice

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00,a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR. USD Euro
$$\begin{array} { c c c c } \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \\8 \% & 8.1 \% & 6 \%& 6.1 \%\end{array}$$ The firms external borrowing opportunities are
$\begin{array}{ccc} & € \text { borrowing } & \$ \text { borrowing } \\\mathrm{A} & € 7 \% & \$ 8 \% \\\mathrm{~B} & € 6 \% & \$ 9 \%\end{array}$

• A)Firm A does 2 swaps with the swap bank,$ at bid and € at ask.Firm B does 2 swaps with the swap bank,$ at ask and € at bid.Firms A and B would each save 90bp and the swap bank would earn 20bp.
• B)There is no mutually beneficial swap at these prices.
• C)Firm A does 2 swaps with the swap bank,$ at ask and € at bid.Firm B does 2 swaps with the swap bank,$ at bid and € at ask.Firms A and B would each save 90bp and the swap bank would earn 20bp.
• D)none of the options

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