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 $$\begin{array} { c c c }
& \text { \$Bortowing } & \text { £ Borrowing } \
& \text { Cost } & \text { Cost } \
\text { Compary X } & \$ 10 \% & £ 10.5 \% \
\text { Compary Y } & \$ 12 \% & £ 13 \%
\end{array}$$ 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 = $10.50%; B = £12%.
B)A = $10%; B = £13%.
C)A = $12%; B = £13%.
D)A = £10.50%; B = $12%.

Question

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 $$\begin{array} { c c c } 
& \text { \$Bortowing } & \text { £ Borrowing } \
& \text { Cost } & \text { Cost } \
\text { Compary X } & \$ 10 \% & £ 10.5 \% \
\text { Compary Y } & \$ 12 \% & £ 13 \%
\end{array}$$ 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 = $10.50%; B = £12%. 
B)A = $10%; B = £13%. 
C)A = $12%; B = £13%. 
D)A = £10.50%; B = $12%.

Quizplus · Accepted Answer

The Answer of 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 $$\begin{array} { c c c } 
& \text { \$Bortowing } & \text { £ Borrowing } \
& \text { Cost } & \text { Cost } \
\text { Compary X } & \$ 10 \% & £ 10.5 \% \
\text { Compary Y } & \$ 12 \% & £ 13 \%
\end{array}$$ 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 = $10.50%; B = £12%. 
B)A = $10%; B = £13%. 
C)A = $12%; B = £13%. 
D)A = £10.50%; B = $12%.

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