Come Up with a Swap (Exchange of Interest and Principal)for

Essay

Come up with a swap (exchange of interest and principal)for parties A and B who have the following borrowing opportunities. $$\begin{array} { | l | c c | } \hline & \epsilon & \$ \\\hline \mathrm { A } & € 5 \% & \$ \mathrm { LIBOR } \% \\\mathrm {~B} & € 6 \% & \$ \mathrm { LIBOR } + 1 / 2 \% \\\hline\end{array}$$ The current exchange rate is $1.60 = €1.00.Company "A" is in Milan,Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S.firm that wants to borrow €625,000 for 5 years at a fixed rate of interest.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.