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%
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%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F86cc7f6f-37f9-428b-b184-f8b07b4a366e%2Fb01388c8-23cd-4a07-b5a3-0eb821674330%2Fgbjd9td_processed.jpeg&w=3840&q=75)
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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