A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year. The spot exchange rate is $2.00 = €1.00, a swap bank makes the following quotes for 1-year swaps and AAA-rated firms against USD LIBOR:
USD Euro
Bid: 8% Bid: 6%
Ask: 8.1% Ask 6.1%
The firms external borrowing opportunities are:
Euro borrowing | USD Borrowing
a. 7% (euro) 8%(usd)
b. 6% (euro) 9%(usd)
How many basis points (bp) can firms A and B each save by venturing info currency swaps?
How many bp will the swap bank earn?
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