Question

Company A can borrow yen at 10.6 percent and dollars at 9.3 percent. Company B can borrow yen at 9.1 percent and dollars at 8.8 percent. If a financial intermediary charges a fee of 0.15 percent, what is the gain to each party to the swap? The gain is evenly split between the two parties and exchange rate risk assumed by the intermediary.

0.5 percent

0.425 percent

0.85 percent

0.575 percent

Show Work Please

Answer 1

Solection : company A borrows dollars at 9.3%. company B borrows yess at 9.1%. They enter into loterest rate | cuorenay Swap Where company A will exchange dollars for yers. Ditterrence in yen interest rates, - 10.6% - 9.1% = 1.5%. Difference in dollar interest rates, = 9.3% - 8.8% = 0.5%. 1. GAP = 10% (-) fepancial internsediary charges a 0.15% Gain = 0.85% shared equally company A = 0.425% company B o 0.525%.

with corrency swap / interest rate swap companys A could borrow yen at 10.1759% (10.6 - 0.425) and comporny B could borrow dollars at 8.875% 1913-0.425), company. A is at gain of 0.425% but company, B ů at a loss of 0.075% as it could borrow dollars at 8.8% but the bet rate it paid is 8.875% so; it should get more share of the gain and not equal share as it is th stronger party here. .