Company A, based in Switzerland, would like to borrow $10 million at a fixed rate of interest. Because the company is not well known, however, it has been unable to find a willing U.S. lender.
Instead, the company can borrow SF17,825,000 at 11 percent per year for five years. Company B, based in the United States, would like to borrow SF17,825,000 for five years at a fixed rate of interest. It has not been able to find a Swiss lender.
However, it has been offered a loan of $10 million at 9 percent per year. Five-year government bonds are yielding 9.5 percent and 8.5 percent in Switzerland and the United States, respectively. Suggest a currency swap that would net the financial intermediary 0.5 percent per year.