Come Up with a Swap (Principal + Interest)for Two Parties $\begin{array}{lcl} & € & \$ \\\mathrm{~A}& \$ LIBOR \%&\$ 8 \% \\\mathrm{~B} &\$ \mathrm{LIBOR}+1 / 2 \%& \$8.20 \% \end{array}$

Essay

Come up with a swap (principal + interest)for two parties A and B who have the following borrowing opportunities.


$\begin{array}{lcl} & € & \$ \\\mathrm{~A}& \$ LIBOR \%&\$ 8 \% \\\mathrm{~B} &\$ \mathrm{LIBOR}+1 / 2 \%& \$8.20 \% \end{array}$ The current exchange rate is $1.60 = €1.00.Company "A" wishes to borrow $1,000,000 for 5 years and "B" wants to borrow €625,000 for 5 years.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.