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%.

---

Definitions:

Strategic Thinking

The ability to anticipate, envision, maintain flexibility, and work with others to initiate changes that will benefit in the future.

Risk-taking Behaviour

Refers to the propensity of an individual or organization to engage in actions that have potential for significant loss or gain.

New Opportunities

Refers to emerging chances or prospects that can potentially lead to growth, development, or benefits in various contexts such as business, career, or innovation.

Internal Locus

A psychological concept indicating that individuals believe they have control over the events in their lives.