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%.

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:  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:  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;