Consider the dollar- and euro-based borrowing opportunities of companies A and B.

\begin{array}{ccc} & € \text { borrowing } & \$ \text { borrowing } \\\mathrm{A} & € 7 \% & \$ 8 \% \\\mathrm{~B} & € 6 \% & \$ 9 \%\end{array}

A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as

\frac { \$ 2.00 \times ( 1.08 ) } { € 1.00 \times ( 1.06 ) }

\frac { \$ 2.0377 } { € 1.00 }

.
Suppose they agree to the swap shown here.Is this mutually beneficial swap equally fair to both parties? $Consider the dollar- and euro-based borrowing opportunities of companies A and B. \begin{array}{ccc} & € \text { borrowing } & \$ \text { borrowing } \\ \mathrm{A} & € 7 \% & \$ 8 \% \\ \mathrm{~B} & € 6 \% & \$ 9 \% \end{array} A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit.Firm A wants to borrow €1,000,000 for one year and B wants to borrow $2,000,000 for one year.The spot exchange rate is $2.00 = €1.00 and the one-year forward rate is given by IRP as \frac { \$ 2.00 \times ( 1.08 ) } { € 1.00 \times ( 1.06 ) } = \frac { \$ 2.0377 } { € 1.00 } . Suppose they agree to the swap shown here.Is this mutually beneficial swap equally fair to both parties? A)Yes,QSD = [€7% ? €6% × $2.00/€1.00] ? ($8% ? $9%)= $2% + $1% = $3%. B)No,company A borrows at 6 percent in euro but company B borrows at 8 percent in dollars. C)Yes,A will be better off by €1 percent on €1m; B by 1 percent on $2m and $2.00 = €1.00. D)No,company A saves 1 percent in euro but company B saves only 1 percent in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B.$
A)Yes,QSD = [€7% ? €6% × $2.00/€1.00] ? ($8% ? $9%)= $2% + $1% = $3%.
B)No,company A borrows at 6 percent in euro but company B borrows at 8 percent in dollars.
C)Yes,A will be better off by €1 percent on €1m; B by 1 percent on $2m and $2.00 = €1.00.
D)No,company A saves 1 percent in euro but company B saves only 1 percent in dollars when the spot exchange rate is $2.00 = €1.00-A is twice as better off as B.

Use the Following Information to Calculate the Quality Spread Differential

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