The following statement is to be used in answering questions
Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%.
-is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?
A) 1%
B) 75%
C) 2%
D) 1.25%

Question

The following statement is to be used in answering questions 
Axil Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1%. Bevel Corp. strongly prefers fixed rate DM debt, but it must pay 1.5% more than the 6 1/4% coupon that Axil's DM notes would carry. Bevel, however, can obtain Eurodollars at LIBOR + ½%.
-is the maximum possible cost savings to Axil from engaging in a currency swap with Bevel?
A) 1%
B) 75%
C) 2%
D) 1.25%

Quizplus · Accepted Answer

Axil Corp wants to be a floating rate dollar borrower but has been hesitant to tap into the Deutsche mark public debt market. Bevel Corp prefers fixed rate DM debt but would have to pay higher than what Axil would pay. Bevel can obtain Eurodollars at LIBOR + ½%. With a currency swap, Axil can exchange their floating rate dollar for Bevel's fixed rate DM debt, and Bevel can obtain the floating rate dollar they prefer. 
With this swap, Axil can obtain fixed rate DM debt and save 1/2% from what they would pay for a floating rate dollar, and Bevel can obtain floating rate dollar debt at LIBOR rate + 1%. The difference between what Axil saves and what Bevel pays is the maximum cost savings, which is 2%. Therefore, the correct answer is C) 2%.

The Following Statement Is to Be Used in Answering Questions