Bombardier, the well-known Canadian company, is looking for e10 million to nance capital expenditures in France to supply rolling stock to the Paris metro.
Bombardier (FR) is the French arm of Bombardiers operations. At the current exchange rate of $2.00/e, Bombardier could issue $20 million in three-year bonds in Toronto at a xed interest rate of 7 percent. Alternatively, Bombardier could issuee 10 million in three-year bonds in Paris, also at a xed interest rate of 7 percent.
Meanwhile, Danone, a French multinational food-products corporation, needs $20 million for its investments in a Quebec cheese factory operated by Danone (Canada).
Danone can issue e10 million in three-year bonds in Paris at a xed rate of 6 percent or a $ 20 million three-year bond issue (a Eurobond issue), also in Paris, at a xed rate of 8 percent.
Both Bombardier and Danone are clients of the Mid-Atlantic Swap Bank. Mid Atlantic quotes three-year dollar interest swaps at 7.00 - 7.15 and three-year euro
(e) interest swaps at 6.00 - 6.10 against dollar LIBOR
(a) Propose a foreign exchange swap that is benecial to Bombardier, BP and Mid-Atlantic;
(b) Identify the rates of interest and currency denomination of the ows to and from the swap bank. Ensure that there is something in it for the Mid-Atlantic Swap Bank.