736f6de9cdcccc639be7285e667c8c7d_20d632c3ca81a06ec311829b3c9b35f1

736f6de9cdcccc639be7285e667c8c7d_20d632c3ca81a06ec311829b3c9b35f1

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Problem 1 (5pts) Company A and B can borrow for a 3-year term at the following rates. While A desires fixed rate borrowing, B prefers floating rate borrowing. Fixed Rate Floating Rate A 8.5% LIBOR + 0.5% B 7% LIBOR The swap bank currently makes a market for plain vanilla 3-year interest rate swaps at 7.25% - 7.5%. 1) Illustrate how Company A benefits from the use of interest rate swap. 2) Summarize the risks taken by the swap bank in the interest swap with Company B. 3) Is it feasible for the swap bank to customize an interest rate swap that provide a cost saving of 0.35% to B? Explain. 4) Suppose both Company A and B entered into the 3-year swaps with the swap bank. One year after the inception of the 3-year swaps, the swap bank quotes 2-year interest rate swaps at 6.5% - 7%. Which company is willing to unwind the original swap? Explain how much it is willing to pay to unwind. Problem 2 (5pts) Dow Chemical (a U.S. MNC) and Michelin (a French tire manufacturer) need to borrow to finance their foreign direct investments. They can issue 10-year bond of $220 million or 10-year bond of €200 million. Although both companies have the same creditworthiness, they have to pay higher interest rates for the debt denominated in foreign currency. Their borrowing costs are as follows:
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