Company Zulu is a U

Subject:BusinessPrice:9.82 Bought3

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Company Zulu is a U.S. MNC and wants to borrow E60 million for 3 years. Company Yankee is a French MNC and wants to borrow $90 million for 3 years. Company Zulu wants finance euro denominated asset in Italy and therefore wants to borrow euro. Company Yankee wants to finance a dollar denominated asset and therefore wants to borrow dollars. The current exchange rate is $1.50 = (1.00. If Company Zulu and Company Yankee knew and trusted each other, they could theoretically cut out the swap bank.

       Firm Zulu         Firm Yankee

         $8.5%                $9.5%

         E6.8%               E5.8%

Required:

(a) Calculate the quality spread differential (QSD). [3 marks]

(b) Develop a swap in which both companies have an equal cost savings in their borrowing costs. Calculate all in costs for each company. [7 marks]

(c) Draw the cash flow chart of both companies. [10 marks]

(d) Briefly describe the benefit of the swap. [6 marks]

(e) How much interest rate Company Zulu gains from swap per year? Briefly explain your result. [4 marks]

                                                                                                                                                        [Total: 30 marks]