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Suppose Company A wants 5-year fixed rate dollar funding while Company B wants 5- year

fixed rate Japanese yen funding. Company As direct borrowing all-in-cost is 9.50% p.a. in

dollars and 7% p.a. in Japanese yen. Company Bs direct borrowing all-in-cost is 8.25% p.a. in

dollars and 8% p.a. in Japanese yen.

Required:

(a) Refer to the quotes by a bank below and design a swap between the two companies

involving the bank. Show, by means of diagrams, the yen rates the bank receives and pays,

and the dollar rates the bank receives and pays.

Note: For all the swap quotes above, the bid rate is the fixed rate the bank pays to the fixed

rate receiver, and the offer rate is the fixed rate that the bank receives from the fixed-rate

payer.

(b) What is the maximum gain for all parties involved through this swap? What is the effective

borrowing cost for each company? How much does each company save through the swap?

Currency Swaps Yen U.S.Dollar Offer (%p.a.) Bid Offer (%p.a.) 7.22 Bid Term Term (%p.a) (%p.a.) 7.53 2 7.18 7.58 7.94 7.17 7.23 7.20 3 7.89 7.15 8.16 8.21 4 5 7.12 7.17 5 8.35 8.39 7 6.89 6.94 7 8.55 8.59 10 6.72 6.86 10 8.68 8.72 Currency Swaps Yen U.S.Dollar Offer (%p.a.) Bid Offer (%p.a.) 7.22 Bid Term Term (%p.a) (%p.a.) 7.53 2 7.18 7.58 7.94 7.17 7.23 7.20 3 7.89 7.15 8.16 8.21 4 5 7.12 7.17 5 8.35 8.39 7 6.89 6.94 7 8.55 8.59 10 6.72 6.86 10 8.68 8.72

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