Come Up with a Swap (Exchange of Interest and Principal)for

question 75

Essay

Come up with a swap (exchange of interest and principal)for parties A and B who have the following borrowing opportunities. $$\begin{array} { | l | c c | } \hline & \epsilon & \$ \\\hline \mathrm { A } & € 5 \% & \$ \mathrm { LIBOR } \% \\\mathrm {~B} & € 6 \% & \$ \mathrm { LIBOR } + 1 / 2 \% \\\hline\end{array}$$ The current exchange rate is $1.60 = €1.00.Company "A" is in Milan,Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S.firm that wants to borrow €625,000 for 5 years at a fixed rate of interest.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.

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Definitions:

Nominal Wage

The wage paid to workers measured in current dollars, without adjustment for inflation.

Price Level

refers to the average of current prices across the entire spectrum of goods and services produced in the economy, often compared over time to assess inflation.

Real Wage

The purchasing power of wages, considering the effect of inflation, representing the quantity of goods and services that can be bought with those wages.

Demand-Enhancing Union

A labor union strategy aimed at increasing demand for the products and services produced by its members.