Consider the dollar- and euro-based borrowing opportunities of companies A and
A)No, QSD = 0
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 $2.00 × (1.08)/€1.00 × (1.06) = $2.0377/€1. Is there a mutually beneficial swap?
B) Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%)
C) Yes, QSD = [€7% - €6%] × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3%
D) Yes, QSD = [€7% - €6%] - ($8% - $9%) × €1.00/$2.00 = €1½%

Question

Consider the dollar- and euro-based borrowing opportunities of companies A and
A)No, QSD = 0 
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 $2.00 × (1.08)/€1.00 × (1.06) = $2.0377/€1. Is there a mutually beneficial swap? 
B) Yes, QSD = 2% = (7% - 6%) - (8% - 9%) = 1% - (-1%) 
C) Yes, QSD = [€7% - €6%] × $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% 
D) Yes, QSD = [€7% - €6%] - ($8% - $9%) × €1.00/$2.00 = €1½%

Quizplus · Accepted Answer

In order for a swap to be mutually beneficial, the quoted swap differential (QSD) must be positive, indicating a benefit to both parties involved. QSD is calculated as the difference between the interest rate differentials of the currencies involved, adjusted for the forward exchange rate. In this case, the QSD is 2%, which is positive and indicates a mutually beneficial swap.

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