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. $$\begin{array} { c | c c }
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l }
F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \
F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }
\end{array}$$
-Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l } 
F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \
F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }
\end{array}$$ 
-Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

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. $$\begin{array} { c | c c } 
& \$ & £ \
\hline \mathrm { A } & \$ 6 \% & £ 5 \% \
\mathrm {~B} & \$ 7 \% & £ 4 \%
\end{array}$$ The IRP 1-year and 2-year forward exchange rates are $$\begin{array} { l } 
F _ { 1 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) } = \frac { \$ 2.0385 } { £ 1.00 } \
F _ { 2 } ( \$ \mid £ ) = \frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } } = \frac { \$ 2.0777 } { £ 1.00 }
\end{array}$$ 
-Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

Consider the Situation of Firm a and Firm B $£A$6%£5% B$7%£4%\begin{array} { c | c c } & \$ & £ \\\hline \mathrm { A } & \$ 6 \% & £ 5 \% \\\mathrm {~B} & \$ 7 \% & £ 4 \%\end{array}A B​$$6%$7%​££5%£4%​​

Consider the Situation of Firm a and Firm B $\begin{array} { c | c c } & \$ & £ \\\hline \mathrm { A } & \$ 6 \% & £ 5 \% \\\mathrm {~B} & \$ 7 \% & £ 4 \%\end{array}$