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 $2.00 × (1.08) /€1.00 × (1.06) = $2.0377/€1.
Is there a mutually beneficial swap?

A) No,QSD = 0
B) Yes,QSD = 2% = (7% ? 6%) ? (8% ? 9%) = 1% ? (?1%)
C) Yes,QSD = [€7% ? €6%] × $2.00/€1.00 ? ($8% ? $9%) = $2% + $1% = $3%
D) Yes,QSD = [€7% ? €6%] ? ($8% ? $9%) × €1.00/$2.00 = €1½%