In what type of borrowing IBM have comparative advantage

Reference no: EM131709333

Financial Derivatives and Risk Management Assignment

IBM and GE are both in the market for approximately $10 million of debt for a five year-period. GE has an AA credit rating while IBM has a single A rating. GE has access to both fixed and floating interest rate debt at attractive rates. However, GE would prefer to borrow at floating rates. Although IBM can borrow at both interest rates, the fixed rate debt is considered expensive. IBM would prefer to borrow at fixed rates. The information about the two firms is summarized as follows:

	GE	IBM
Credit Rating	AAA	A
Floating Rates	LIBOR + ¼%	LIBOR + ¾%
Fixed Rates	9%	10%
Preference	Floating	Fixed

Please answer the following questions:

1. In what type of borrowing does IBM have the comparative advantage? Why?

2. In what type of borrowing does GE have the comparative advantage? Why?

3. If a swap were arranged, what is the maximum savings that could be divided between the two parties?

4. Please arrange such a swap so that the total saving is divided evenly between the two parties. No financial institution is needed. Please use arrows and boxes to illustrate the deal.

Reference no: EM131709333

Questions Cloud

Calculate the new volume for a silver cube : Calculate the new volume for a silver cube that measures 3.15 ft on a side, if the temperature is increased from 15oC to 230oC.

Discuss about the wage and hour division : Company A sells airtime and infomercials on television. It employs telephone callers at $9 per hour. Company B, which is owned by the same parent company.

Identify one monopoly from which you buy a good or service : Identify one monopoly from which you buy a good or service. Identify one oligopoly from which you buy a good or service.

Should volunteer ambulance company required to pay drivers : A volunteer ambulance company contracts with a for-profit corporation to provide drivers and emergency medical technicians (EMTs).

In what type of borrowing IBM have comparative advantage : FIN368 Financial Derivatives and Risk Management Assignment. In what type of borrowing does IBM have the comparative advantage? Why

Millionaires get obamacare subsidies intended : Discuss the role of subsidies in the Affordable Care Act as explained in the assigned article "How Millionaires Get Obamacare Subsidies.

Intermediate microeconomics-production : Pfeitzer is a monopolist for a new drug that makes people feel thinner. The total cost function is C(Q) = 100 + 12Q + 2Q2 .

Value base pricing and selling is based on the concept : Value base pricing/selling is based on the concept:

In what amounts were determinations made by the ceo : The employer established a performance-based bonus plan under which workers who were not exempt from the minimum wage and overtime provisions of the FLSA.

User Account

All Pages