Suppose 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 4.75% or floating-rate dollars at LIBOR + 0.35%. KDB can borrow fixed-rate yen at 4.90% or floating-rate dollars at LIBOR + 0.75%.
(a) What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB?
(b) Assuming a notional principal equivalent to $125 million and a current exchange rate of 105/$, what do these possible cost savings translate into in yen terms?
(c) Redo parts a and b assuming the parties use Bank of America, which charges 8 basis points to arrange the swap.