Consider the Dollar- and Euro-Based Borrowing Opportunities of Companies a and B

Multiple Choice

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.