79 act as a swap bank and quote bid and ask prices to

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International Economics
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Chapter 14 / Exercise 03
International Economics
Carbaugh
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79.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.80.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) 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.81.What are the IRP 1-year and 2-year forward exchange rates?
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International Economics
The document you are viewing contains questions related to this textbook.
Chapter 14 / Exercise 03
International Economics
Carbaugh
Expert Verified
82.Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6% USD loan into a 2-year pound denominated loan. 83.What would be the interest rate? 84.Explain how this opportunity affects which swap firm A will be willing to participate in. 85.Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan. 86.What would be the interest rate? 87.Explain how this opportunity affects which swap firm B will be willing to participate in.
88.Devise a direct swap for A and B that has no swap bank. Show their external borrowing. Answer the problem in the template provided.89.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.90.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, in 5 years.Construct a mutually beneficial INTEREST ONLY swap that makes money for A, B, and the swap bank IN EQUAL MEASURE. 92. 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% on £20 million for interest at 10% 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% and £11%. 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? 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.

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