76) Consider the situation of firm A and firm B. The current exchange rate is $1.50/€. Firm A is a
U.S. MNC and wants to borrow €40 million for 2 years. Firm B is a French MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown; both firms have AAA
credit ratings.
$
€
A
$
7
%
€
6
%
B
$
8
%
€
5
%
If firm B could use the forward exchange markets to redenominate a 2-year €40m 5 percent euro
loan into a 2-year USD-denominated loan, what would be the interest rate?
77) Consider the situation of firm A and firm B. The current exchange rate is $1.50/€. Firm A is a
U.S. MNC and wants to borrow €40 million for 2 years. Firm B is a French MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown; both firms have AAA
credit ratings.
$
€
A
$
7
%
€
6
%
B
$
8
%
€
5
%
Explain how this opportunity affects which swap firm B will be willing to participate in.
78) Consider the situation of firm A and firm B. The current exchange rate is $1.50/€. Firm A is a
U.S. MNC and wants to borrow €40 million for 2 years. Firm B is a French MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown; both firms have AAA
credit ratings.
$
€
A
$
7
%
€
6
%
B
$
8
%
€
5
%
Devise a direct swap for A and B that has no swap bank. Show their external borrowing.
79) Consider the situation of firm A and firm B. The current exchange rate is $1.50/€. Firm A is a
U.S. MNC and wants to borrow €40 million for 2 years. Firm B is a French MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown; both firms have AAA
credit ratings.
$
€
A
$
7
%
€
6
%
B
$
8
%
€
5
%
Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and
promise to make at least 20bp for your firm.
Bid
Ask
Bid
Ask
Bid
7
%
7.1
%
%
%
$
€
A
$
7
%
€
6
%
B
$
8
%
€
5
%
81) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
What are the IRP 1-year and 2-year forward exchange rates?
82) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6
percent USD loan into a 2-year pound denominated loan.
83) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
If firm A could use the forward exchange markets to redenominate a 2-year $60m 6 percent USD
loan into a 2-year pound denominated loan, what would be the interest rate?
84) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Explain how this opportunity affects which swap firm A will be willing to participate in.
85) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4
percent pound sterling loan into a 2-year USD-denominated loan.
86) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
If firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound
sterling loan into a 2-year USD-denominated loan, what would be the interest rate?
87) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Explain how this opportunity affects which swap firm B will be willing to participate in.
88) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Devise a direct swap for A and B that has no swap bank. Show their external borrowing.
89) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Act as a swap bank and quote bid and ask prices to A and B that are attractive to A and B and
promise to make at least 20bp for your firm.
Bid
Ask
Bid
Ask
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
90) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
Show how your proposed swap would work for firm A. (e.g., if you were acting as an agent for the
swap bank, try to “sell” firm A on your swap)
91) Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at
a fixed rate. B wants to finance a $100,000,000 project at a floating rate. Both firms want the same
maturity, 5 years.
Firm
Fixed Rate
Floating
A
$
10.3
%
Prime + 1%
B
$
8.9
%
Prime + 1/2%
Construct a mutually beneficial interest only swap that makes money for A, B, and the swap bank
in equal measure.
92) Consider the borrowing rates for Parties A and B. A wants to finance a $100,000,000 project at
a fixed rate. B wants to finance a $100,000,000 project at a floating rate. Both firms want the same
maturity, 5 years.
Firm
Fixed Rate
Floating
A
$
10.3
%
Prime + 1%
B
$
8.9
%
Prime + 1/2%
For your swap (the one you have shown above) how would the swap bank quote the swap against
prime? (Hint: they are quoting a bid-ask spread against “flat” prime.)
93) An interest-only currency swap has a remaining life of 18 months. It involves exchanging
interest at 14 percent on £20 million for interest at 10 percent on $14 million once a year. The term
structure of interest rates is currently flat in both the U.S. and in the U.K. If the swap were
negotiated today the interest rates exchanged would be $8 percent and £11 percent. All rates were
quoted with annual compounding. The current exchange rate is $1.95 = £1. What is the value of the
swap to the party paying dollars?
94) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how firm A could use two of the swaps offered above to hedge its exchange rate risk.
95) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.
96) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6
percent USD loan into a 2-year pound denominated loan.
97) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how this opportunity affects which swap firm A will be willing to participate in.
98) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4
percent-pound sterling loan into a 2-year USD-denominated loan.
99) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Explain how this opportunity affects which swap firm B will be willing to participate in.
58
100) Consider the situation of firm A and firm B. The current exchange rate is $2.00/£ Firm A is a
U.S. MNC and wants to borrow £30 million for 2 years. Firm B is a British MNC and wants to
borrow $60 million for 2 years. Their borrowing opportunities are as shown, both firms have AAA
credit ratings.
$
£
A
$
6
%
£
5
%
B
$
7
%
£
4
%
The IRP 1-year and 2-year forward exchange rates are
($ ∣ £) = =
($ ∣ £) = =
USD pounds
Bid
Ask
Bid
Ask
6
%
6.1
%
4
%
4.1
%
Devise a direct swap for A and B that has no swap bank. Show their external borrowing. Answer
the problem in the template provided
59
Copyright © 2018 McGraw-Hill
Answer:
Topic: Miscellaneous Swap Problems