Consider the dollar- and euro-based borrowing opportunities of companies A and
A)Yes, QSD = [€7% - €6% × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3%
B) 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 and the one-year forward rate is given by IRP as: Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties?
B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars
C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00
D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B

Question

Consider the dollar- and euro-based borrowing opportunities of companies A and
A)Yes, QSD = [€7% - €6% × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
B) 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 and the one-year forward rate is given by IRP as: Suppose they agree to the swap shown at right. Is this mutually beneficial swap equally fair to both parties? 
B) No, company A borrows at 6% in euro but company B borrows at 8% in dollars 
C) Yes, A will be better off by €1% on €1m; B by 1% on $2m and $2.00 = €1.00 
D) No, company A saves 1% in euro but company B saves only 1% in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B

Quizplus · Accepted Answer

The swap is mutually beneficial and equally fair to both parties because both companies save 1% on their borrowing costs compared to borrowing in their domestic currency. Company A saves 1% on €1 million at a cost of €10,000, while Company B saves 1% on $2 million at a cost of $20,000. Since the spot exchange rate is $2.00 = €1.00, both companies benefit equally from the swap.

Consider the Dollar- and Euro-Based Borrowing Opportunities of Companies a and