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Estimating the currency swap

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Currency Swap

Company A would like to borrow pounds, and Company B would like to borrow dollars. Because company A is better known in the US, it can borrow on dollars at 5% and pounds at 7%, whereas company B can borrow dollars at 6% and pounds at 6.5%. Suppose Company A wants to borrow at £1,000,000 for two years, and company B wants t borrow $1,500,000 for two years, and the current ($/£) exchange rate is $1.50/£.

- What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments ?

- What savings are realized by Company A and Company B?

Reference no: EM132507592

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