Question

1. Suppose that Thales would like to borrow fixed-rate yen, whereas Korea Development Bank would like to borrow floating rate US dollars. Thales can borrow fixed-rate at 4.9% or floating $ at LIBOR + 0.25%. KDB can borrow fixed rate 4.5% for the ¥ and LIBOR +0.8% for the $.

1. What are the possible cost savings that Thales can realize through an interest rate/currency swap with KDB?

2. Assuming a notional principal of $125 million, and spot rate ¥105/$, what do the possible cost savings translate into in Japanese yen terms?

Answer 1

fe Solution Given that, borrowin fined rate=4.9% fined constanta 4.5% principal = $125 million Spot rate = 105$ We can see that IBM has absolute advantage in floating rate borrowing and fixed rate borrowing cases. but IBM has comparative advantage in . floting rate borrowing and KDB has comparative advantage in fixed rate borrowing. Difference in floating = LIBOR +0.8%-LIBOR +0.252 -10-55% Difference in fixed rate2484-415 -0.4 % Thus by entering into the interest rate swap overall cost Saving = 0.55-0147 - 10.15% if profits are equally distributed then profit for IBM = 0.15/2 =10.0154 B) 0.075/100X125000,000 X 105 -A843750 yen? cs Song down _ The End =