Dell Computers would like to borrow pounds, and HP wants to borrow dollars. Dell can borrow on its own dollars at 7 percent and pounds at 9 percent, whereas HP can on its own borrow dollars at 8 percent and pounds at 8.5%
a. Suppose Dell wants to borrow £10 million for two years, HP wants to borrow $16 million for two years, and the current ($/£) exchange rate is $1.60. What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments.
b. What savings are realized by Dell and HP?