Which strategy below would take advantage of the following comparative advantage?
A)Company X should borrow fixed and Company Y should borrow floating, then they should swap their interest payments.
B)Company X should borrow floating and Company Y should borrow fixed, then they should swap their interest payments.
C)Company X should borrow fixed and Company Y should borrow floating, but there is no benefit to a entering a swap.
D)Company X should borrow floating and Company Y should borrow fixed, but there is no benefit from entering a swap.
E)There is no opportunity for comparative advantage here.

Question

Which strategy below would take advantage of the following comparative advantage? 
A)Company X should borrow fixed and Company Y should borrow floating, then they should swap their interest payments. 
B)Company X should borrow floating and Company Y should borrow fixed, then they should swap their interest payments. 
C)Company X should borrow fixed and Company Y should borrow floating, but there is no benefit to a entering a swap. 
D)Company X should borrow floating and Company Y should borrow fixed, but there is no benefit from entering a swap. 
E)There is no opportunity for comparative advantage here.

Quizplus · Accepted Answer

The theory of comparative advantage suggests that each country (or in this case, each company) should specialize in producing the goods or services in which they have the lowest opportunity cost, and then trade with other countries (or companies) to obtain the goods or services that they are not producing. In this context, the comparative advantage lies in the difference between the fixed and floating interest rates for each company. Company X should borrow at a fixed interest rate because it has a comparative advantage in fixed-rate borrowing, while Company Y should borrow at a floating interest rate because it has a comparative advantage in floating-rate borrowing. By swapping their interest payments, they can both benefit from each other's comparative advantage, resulting in lower borrowing costs for both companies. Therefore, the best choice is B.

Which Strategy Below Would Take Advantage of the Following Comparative