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Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 62

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: $\begin{array} { c c c } & \$ & £ \\& \text { Borrowing Cost } & \text { Borrowing Cost } \\\hline \text { Company X } & \$ 10 \% & £ 10.5 \% \\\text { Company Y } & \$ 12 \% & £ 13 \%\end{array}$ A swap bank proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5%.Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12%. $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 { Borrowing Cost } & \text { Borrowing Cost } \\ \hline \text { Company X } & \$ 10 \% & £ 10.5 \% \\ \text { Company Y } & \$ 12 \% & £ 13 \% \end{array} A swap bank proposes the following interest-only swap: Company X will pay the swap bank annual payments on $10,000,000 at an interest rate of $9.80%; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5%.Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80% and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12%. If company X takes on the swap,what external actions should they engage in? A) They should borrow $10,000,000 at $10% B) They should borrow £5,000,000 at 10.50% interest-only for five years; translate pounds to dollars at the spot rate. C) They should borrow £5,000,000 at £10.50% interest-only for five years; translate pounds to dollars at the spot rate; enter long position in a forward contract to buy £5,000,000 in five years. D) None of the above$ If company X takes on the swap,what external actions should they engage in?

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Definitions:

Formal Communication Channel

A structured path of communication within an organization that follows official lines of authority.

Classified Ad

A short advertisement placed in a newspaper, magazine, or online platform, categorized by subject, used primarily for selling, buying, or trading services and goods.

Communities of Practice

A group of people who share a concern or a passion for something they do and learn how to do it better as they interact regularly.

Employee Networks

Groups or communities within an organization where employees can connect, share information, and support each other professionally and personally.