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Explain the collateral debt obligation

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Reference no: EM132952921

The table below shows the 5-year fixed-rate borrowing costs to Firm A and Firm B in US dollars (USD) and Australian dollars (AUD).

Borrowing rates providing basis for currency swap.

USD AUD

Firm A 5.0% 7.5%

Firm B 7.0% 8.0%

Question1: Assume that the amounts required by the two companies are roughly the same at the current exchange rate. Design a swap that will net a bank, acting as intermediary, 30 basis points per annum and that will appear equally attractive to both companies and ensure that all foreign exchange risk is assumed by the bank. 

Question2: Discuss whether the following statement is true or false: "Collateral debt obligation is a contract that provides insurance against the risk of a default by particular company."

Reference no: EM132952921

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