A US-Based Corporation Wants to Raise Fixed-Rate Dollar Financing

question 16

Multiple Choice

A US-based corporation wants to raise fixed-rate dollar financing. It finds it can borrow fixed in USD at 6% per annum. It can also borrow fixed in JPY at 2% per annum. It can enter into a USD-JPY currency swap in which 2% fixed JPY interest rates are exchanged for USD Libor. Lastly, the company can enter into a USD plain vanilla fixed-vs-Libor interest rate swap with a fixed rate of 5.75%. Given this information, the company's best option is to

• A) Raise USD fixed rate financing directly.
• B) Raise USD floating rate financing at Libor plus 25 basis points and swap into fixed.
• C) Raise fixed-rate JPY financing and leave it unhedged (i.e., do not enter into any swaps).
• D) Raise JPY fixed rate financing, swap into USD fixed using a currency swap and an interest-rate swap.

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Definitions:

Fundamental Attribution Error

Error that arises from attributing another person’s behavior to internal, controllable causes rather than to external, uncontrollable causes.

Stereotype

To place a person or group of persons into an inflexible, all-encompassing category.

Stereotyping

The act of assigning a fixed, oversimplified image or idea to a person or group, often based on limited information and resulting in prejudiced attitudes or actions.

Affection

A feeling of fondness or liking for someone or something, often shown through physical or verbal gestures.