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 firm's external borrowing opportunities are: $$\begin{array} { c | c c }
& € \text { borrowing } & \text { \$ borrowing } \
\hline \mathrm { A } & € 7 \% & \$ 8 \% \
\mathrm {~B} & € 6 \% & \$ 9 \%
\end{array}$$
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

Question

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 firm's external borrowing opportunities are: $$\begin{array} { c | c c } 
& € \text { borrowing } & \text { \$ borrowing } \
\hline \mathrm { A } & € 7 \% & \$ 8 \% \
\mathrm {~B} & € 6 \% & \$ 9 \%
\end{array}$$
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

Quizplus · Accepted Answer

The Answer of 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 firm's external borrowing opportunities are: $$\begin{array} { c | c c } 
& € \text { borrowing } & \text { \$ borrowing } \
\hline \mathrm { A } & € 7 \% & \$ 8 \% \
\mathrm {~B} & € 6 \% & \$ 9 \%
\end{array}$$
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

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