Consider the Situation of Firm a and Firm B $$\begin{array} { l l l } & \$ & £ \\\text { A } & \$ 6 \% & £5 \% \\B & \$7 \% & £ 4\%\end{array}$$

question 64

Essay

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
$$\begin{array} { l l l } & \$ & £ \\\text { A } & \$ 6 \% & £5 \% \\B & \$7 \% & £ 4\%\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds
$$\begin{array} { c c c c } \text { Bid } & \text { Ask } & \text { Bid } & \text { Ask } \\6\% & 6.1 \% & 4 \%& 4 .1\%\end{array}$$ Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided

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Definitions:

Compliance

The act of conforming to rules, standards, or instructions, often in a legal, ethical, or organizational context.

Resistance

Opposition or pushback against proposals, changes, or directives perceived as unwanted or detrimental.

Exchange Tactic

is a strategy in negotiations where something is offered in return for something from the other party.

Reward

Benefits, compensation, or recognition given to individuals or groups as recognition for their efforts, achievements, or behavior.