Company X Wants to Borrow $10,000,000 Floating for 1 Year;

question 15

Multiple Choice

Company X wants to borrow $10,000,000 floating for 1 year; company Y wants to borrow £5,000,000 fixed for 1 year.The spot exchange rate is $2 = £1 and IRP calculates the one-year forward rate as $2.00*(1.08) /£1.00*(1.06) = $2.0377/£1.Their external borrowing opportunities are: $$\begin{array} { c c c } & \$ & £ \\& \text { Borrowing } & \text { Borrowing } \\& \text { Cost } & \text { Cost } \\\hline \text { Company X } & \$ 8 \% & £ 7 \% \\\text { Company Y } & \$ 9 \% & £ 6 \%\end{array}$$ 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 = £7%; B = $9%.
• B)A = $8%; B = £6%.
• C)A = $7%; B = £7%.
• D)A = $8%; B = £8%.

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Definitions:

Revenue Accounts

Accounts that track the income earned from the sale of goods and services, or the increase in equity resulting from the operations of an organization.

Owner's Capital Account

An account on a company's balance sheet that represents the owner's invested capital plus retained earnings minus withdrawals.

Balance Sheet Accounts

Accounts that reflect the financial position of a company at a specific point in time, including assets, liabilities, and shareholders' equity.

Closing Entry Process

The procedure used at the end of an accounting period to transfer balances from temporary accounts to permanent accounts, clearing the temporary accounts for the next period.