Johnson Corp. has not tapped the Deutsche mark public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating rate dollar borrower, which it can be at LIBOR + 1.1%. Apex Corp. strongly prefers fixed rate DM debt, but it must pay 1.6% more than the 6.25% coupon that Johnson’s DM notes would carry. Apex, however, can obtain Eurodollars at LIBOR + 0.5%.
(a) What is the maximum possible cost savings to Johnson from engaging in a currency swap with Apex?
(b) Suppose a bank charges .7% to arrange the swap and Johnson and Apex split the resulting cost savings. Calculate borrowing cost for each company.