Problem
Apple wishes to borrow US dollars at a fixed rate of interest. Amazon wishes to borrow Euros at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rate.
The companies can borrow - after-tax - at the following interest rates in the two currencies:
|
|
EURO
|
USD
|
|
Apple
|
4%
|
4.6%
|
|
Amazon
|
5.5%
|
5%
|
Design a cross-currency swap that will net a swap bank, acting as intermediary, 50 basis points (0.50%) per year. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is assumed by the bank.