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Question - Company Zulu is a U.S. MNC and wants to borrow E60 million for 3 years. Company Yankee is a French MNC and wants to borrow $90 million for 3 years. Company Zulu wants finance euro denominated asset in Italy and therefore wants to borrow euro. Company Yankee wants to finance a dollar denominated asset and therefore wants to borrow dollars. The current exchange rate is $1.50 = (1.00. If Company Zulu and Company Yankee knew and trusted each other, they could theoretically cut out the swap bank.
Firm Zulu
Firm Yankee
$
$8.5%
$9.5%
€
€6.8%
€5.8%
Required -
(a) Calculate the quality spread differential (QSD).
(b) Develop a swap in which both companies have an equal cost savings in their borrowing costs. Calculate all in costs for each company.
(c) Draw the cash flow chart of both companies.
(d) Briefly describe the benefit of the swap.
(e) How much interest rate Company Zulu gains from swap per year? Briefly explain your result.
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