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

Multiple Choice

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

A) No, QSD = 0
B) 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?
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%