A Is a US-Based MNC with AAA Credit; B Is an Italian Firm

question 79

Multiple Choice

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR: The firms external borrowing opportunities are:

• A)Firm A does 2 swaps with the swap bank, $ at bid and € at ask. Firm B does 2 swaps with the swap bank, $ at ask and € at bid. Firms A and B would each save 90bp and the swap bank would earn 20bp.
• B)There is no mutually beneficial swap at these prices.
• C)Firm A does 2 swaps with the swap bank, $ at ask and € at bid. Firm B does 2 swaps with the swap bank, $ at bid and € at ask. Firms A and B would each save 90bp and the swap bank would earn 20bp.
• D)None of the above

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