Company A, a French manufacturer, wishes to borrow U.S. dollars at a fixed rate
ID: 2427535 • Letter: C
Question
Company A, a French manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest for one year. Company B, a U.S. multinational firm, wishses to borrow euro ay a fixed rate of interest for one year. They have been quoted the following rates per annum:
Company A: Euro 8.6% U.S. Dollar: 5%
Company B: Euro 9% U.S. Dollar: 4.2%
a. design a swap that: (i)- will net a bank, acting as intermediary, 15% of QSD (quality spread differential) per annum in euro and 15% of the QDS in the U.S. dollars; and (ii)- will generate a gain of 35% QSD per annum for A and 35% of QSD for company B.
b. suppose that the notional value of swap is $145 millio and 100 million euros at the initial spot exchange rate of ($1.45/euro). Calculate gains (losses) for the intermediary bank if the exchange rate will be ($1.90/euro) one year from now. Explicitly show Bank;s gains or losses in each currency after one year.
Explanation / Answer
Answer
Answer (a) (i) and (ii)
Company A will borrow loan in Euro at 8.6 % per annum and Company B will borrow loan in US dollar at 4.2% per annum.
Particulars
Company A
Company B
French Manufacturer
U.S. Multinational firm
QSD
wishes to borrow U.S. dollars at a fixed rate of interest
wishes to borrow euro at a fixed rate of interest
Difference
one year
one year
%
%
%
Euro
8.6
9
0.4
US dollar
5
4.2
0.8
QSD (quality spread differential) per annum
1.2
Design of swap
Particulars
% of QSD
QSD per annum (%)
Gain (%)
A
B
Intermediary bank
A*B
Euro
15%
1.2
0.18
U.S. Dollars
15%
1.2
0.18
company A
35%
1.2
0.42
Company B
35%
1.2
0.42
Answer (b)
Table showing Bank’s gains or losses in each currency after one year.
Particulars
Gain
Notional value of swap after one year (Euro in million)
Notional value of swap after one year (US Dollar in million)
Gain (In million)
Formula
A
B
C
Intermediary bank
Euro
0.18%
100
-
0.18 Euro
A*B
U.S. Dollars
0.18%
-
190
(100*1.90)
0.342 US Dollar
A*C
Particulars
Company A
Company B
French Manufacturer
U.S. Multinational firm
QSD
wishes to borrow U.S. dollars at a fixed rate of interest
wishes to borrow euro at a fixed rate of interest
Difference
one year
one year
%
%
%
Euro
8.6
9
0.4
US dollar
5
4.2
0.8
QSD (quality spread differential) per annum
1.2
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