Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Bhuptbhai 

Consider the dollar- and euro-based borrowing opportunities of companies A and B.
€ borrowing
$ borrowing
A
€ 7%
B
C 6%
$ 8%
$ 9%
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 x (1.08)/€1.00 x (1.06) = $2.0377/€1.
Is there a mutually beneficial swap?
Multiple Choice
О
Yes, Savings [€7% - €6%] * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3%
О
Yes, Savings =2% = (7 % -6%) - (8% -9%) = 1%-(-1%)
О
No, Savings = 0
О
Yes, Savings = [€7% - €6%] - ($8% - $9%) * €1.00/$2.00 = €12%
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Transcribed Image Text:Consider the dollar- and euro-based borrowing opportunities of companies A and B. € borrowing $ borrowing A € 7% B C 6% $ 8% $ 9% 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 x (1.08)/€1.00 x (1.06) = $2.0377/€1. Is there a mutually beneficial swap? Multiple Choice О Yes, Savings [€7% - €6%] * $2.00/€1.00 - ($8% - $9%) = $2% + $1% = $3% О Yes, Savings =2% = (7 % -6%) - (8% -9%) = 1%-(-1%) О No, Savings = 0 О Yes, Savings = [€7% - €6%] - ($8% - $9%) * €1.00/$2.00 = €12%
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