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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