Spot Exchange Rate Assignment | Homework For You

Refer to the following table for the USD and EUR borrowing costs for U.S. Company and Italian Company. U.S. Company A has an AAA credit rating. Italian Company also has an AAA credit rating. U.S. Company A wants to borrow €1,000,000 for one year. Italian Company wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00. The one-year forward rate is given by IRP is [$2.00×(1.08)]/[€1.00×(1.06)] = $2.0377€1.00. Will the swap agreement summarized in the following diagram be equally beneficial to both companies? € borrowing $ borrowing U.S. Company € 7 % $ 8 % Italian Company € 6 % $ 9 % Multiple Choice Yes, since U.S. Company saves €1% on €1,000,000 and Italian Company saves $1% on $2,000,000 at the spot exchange rate. No, since both companies have an AAA credit rating there is no swap agreement that can make both companies better off. Yes, because the quality spread differential is [€7% − €6% × $2.00/€1.00] − ($8% − $9%) = $2% + $1% = $3%. No, since U.S. Company borrows in EUR at €6% and Italian Company borrows in USD at $8%. No, since U.S. Company saves €1% on €1,000,000, but Italian Company saves only saves $1% on $2,000,000 at the spot exchange rate—U.S. Company is twice as better off as Italian Company. Get Finance homework help today