FIU FIN4486 Homework 3 Chapters 7 38089

| November 13, 2015

Question

Company A can borrow yen at 14.1 percent and dollars at 13.2 percent. Company B can borrow yen at 15.5 percent and dollars at 13.667 percent. At what interest rates, do company A and B respectively have a comparative advantage?

Selected Answer:

Answers:

a.

A: 13.2 percent, B: 15.5 percent

b.

A: 14.1 percent, B: 13.667 percent

c.

B has comparative advantage in both markets.

d.

A has a comparative advantage in both markets.

 

• Question 2

20 out of 20 points

 

Company A can borrow yen at 10.6 percent and dollars at 9.3 percent. Company B can borrow yen at 9.1 percent and dollars at 8.8 percent. If a financial intermediary charges a fee of 0.15 percent, what is the gain to each party to the swap? The gain is evenly split between the two parties and exchange rate risk assumed by the intermediary.

Selected Answer:

 

Answers:

a.

0.5 percent

b.

0.425 percent

c.

0.85 percent

d.

0.575 percent

 

• Question 3

20 out of 20 points

 

Company A can borrow yen at 16.0 percent and dollars at 14.6 percent. Company B can borrow yen at 14.6 percent and dollars at 14.133 percent. If A would like to borrow yen and B would like to borrow dollars. The financial intermediary charges a fee of 0.14. The gain is evenly split between the two parties and exchange rate risk assumed by the intermediary. Design a swap. What is company A’s yen rate leg and B’s dollar rate leg in the swap?

Selected Answer:

 

Answers:

a.

A: receive 14.203 percent yen, B: receive 14.203 percent dollars

b.

A: pay 14.063 percent yen, B: pay 14.063 percent dollars

c.

A: receive 15.463 percent yen, B: receive 13.597 percent dollars

d.

A: pay 15.603 percent yen, B: pay 13.737 percent dollars

 

• Question 4

20 out of 20 points

 

Company A can borrow fixed at 13.3 percent and floating at LIBOR+ 0.6 percent. Company B can borrow fixed at 12.1 percent and floating at LIBOR+ 0 percent. If a financial intermediary charges a fee of 0.12 percent, what is the gain to each party to the swap? Assume the gain is evenly split between the two parties.

Selected Answer:

 

Answers:

a.

0.84 percent

b.

0.3 percent

c.

0.24 percent

d.

0.36 percent

 

• Question 5

20 out of 20 points

 

Company A can borrow fixed at 14.8 percent and floating at LIBOR percent. Company B can borrow fixed at 16.2 percent and floating at LIBOR+ 0.35 percent. A financial intermediary charges a fee of 0.14 percent. Company A wishes to borrow floating and company B wishes to borrow fixed. Assume the gain is evenly split between the two parties and floating rate legs are LIBOR. Design the swap. What is the company A’s fixed rate leg and company B’s fixed rate leg, respectively.

Selected Answer:

 

Answers:

a.

A: receive 15.255, B: pay 15.395 percent

b.

A: pay 15.255, B: receive 15.395 percent

c.

A: receive 15.395, B: pay 15.255 percent

d.

A: receive 14.345, B: pay 17.005 percent

 

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