Task:
Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.5 percent or floating-rate dollars at LIBOR + 0.25 percent. KDB can borrow fixed-rate yen at 4.9 percent or floating-rate dollars at LIBOR + 0.8 percent.
Question 1: What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB?
Question 2: Assuming a national principal equivalent to $125 million and a current exchange rate of ¥105/$, what do these possible cost savings translate into in yen terms?
Question 3: Redo parts 1 and 2 assuming that the parties use Bank of America, which charges a fee of 8 basis points to arrange the swap.