Company X Wants to Borrow $10,000,000 Floating for 5 Years;

question 64

Multiple Choice

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow £5,000,000 fixed for 5 years. The exchange rate is $2 = £1 and is not expected to change over the next 5 years. Their external borrowing opportunities are: 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 = $10.50%; B = £12%.
• B)A = $10%; B = £13%.
• C)A = $12%; B = £13%.
• D)A = £10.50%; B = $12%.

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Definitions:

First Impression

The initial judgment or assessment of something or someone, formed on first encountering them, often considered to be lasting and significant.

Legal Authorities

Sources of law, such as statutes, cases, or regulations, that have the power to bind or guide legal proceedings.

Government Policy

A course of action or a set of decisions adopted by a government or a political entity to influence or guide a wide range of activities and behaviors.

Equitable Remedy

A form of legal relief sought in a lawsuit that requires a party to act or refrain from acting, rather than merely paying damages.