Come Up with a Swap (Principal + Interest)for Two Parties

question 4

Essay

Come up with a swap (principal + interest)for two parties A and B who have the following borrowing opportunities. $$\begin{array} { | c | c c | } \hline & \boldsymbol { \epsilon } & \boldsymbol { \$ } \\\hline \mathrm { A } & € \mathrm { €IBOR } \% & \$ 8 \% \\\mathrm {~B} & € \mathrm { ELBOR } + 1 / 2 \% & \$ 8.20 \% \\\hline\end{array}$$ The current exchange rate is $1.60 = €1.00.Company "A" wishes to borrow $1,000,000 for 5 years and "B" wants to borrow €625,000 for 5 years.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.

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Definitions:

Ledger Accounts

A record in accounting that is used to aggregate monetary transactions by account, monitoring debits and credits over a period.

Journal Entries

The recorded transactions in the financial books of a company, serving as the initial step in the accounting cycle.

T-Accounts

A graphical representation of a general ledger account, showing debits on the left side and credits on the right side to track transactions.

Luca Pacioli

An Italian mathematician and friar credited as the "Father of Accounting" for his contributions to the field, including bookkeeping principles.