Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
$$\begin{array} { l l l }
& \$ & £ \
\text { A } & \$ 6 \% & £5 \% \
B & \$7 \% & £ 4\%
\end{array}$$ Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan.

Question

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
 $$\begin{array} { l l l } 
& \$ & £ \
\text { A } & \$ 6 \% & £5 \% \
B & \$7 \% & £ 4\%
\end{array}$$ Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan.

Quizplus · Accepted Answer

The Answer of Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
 $$\begin{array} { l l l } 
& \$ & £ \
\text { A } & \$ 6 \% & £5 \% \
B & \$7 \% & £ 4\%
\end{array}$$ Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan.

Consider the Situation of Firm a and Firm B $£ A $6%£5%B$7%£4%\begin{array} { l l l } & \$ & £ \\\text { A } & \$ 6 \% & £5 \% \\B & \$7 \% & £ 4\%\end{array} A B​$$6%$7%​££5%£4%​

Consider the Situation of Firm a and Firm B $\begin{array} { l l l } & \$ & £ \\\text { A } & \$ 6 \% & £5 \% \\B & \$7 \% & £ 4\%\end{array}$