Computation of savings with Interest rate swaps on the borrowings.
Dell Inc. wants to borrow pounds, and Virgin Airlines wants to borrow dollars. Because Dell is better known in the U.S., it can borrow on its own dollars at 7% and pounds at 9%, whereas Virgin can borrow dollars at 8% and pounds at 8.5%.
a. Suppose, in fact, that Dell can borrow dollars at 7% and pounds at 9%, whereas Virgin can borrow dollars at 8.75% and pounds at 9.5%. What range of interest rates would make this swap attractive to both parties?
b. Based on the scenario in 1.c, suppose Dell borrows dollars at 7% and Virgin borrows pounds at 9.5%. If the parties swap their current proceeds, with Dell paying 8.75% to Virgin for pounds and Virgin paying 7.75% to Dell for dollars, what are the cost savings to each party?