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Use question 7 information to help answer question number 8
7. CompanyY would like to borrow $10 million at floating rates to fund a 5-year project while CompanyX desires $10 million at a fixed rate to complete its 5-year construction plans. Company Y and Company X have been offered the following 5-year fixed and floating rates per annum: Y X
S&P credit rating Aa Baa
Fixed-rate borrowing cost 8.25% 10.0%
Floating-rate borrowing cost LIBOR LIBOR + 0.5%
The quality spread differential (QSD) is:
d. None of the above
8. Use the information in question 7 to answer question 8. The swap bank wants to earn 0.05% in fee income to arrange a swap that divides the QSD equally between the two companies. What would be the final interest rates on the payment streams of each company to achieve this outcome?
a. CompanyY would pay LIBOR and receive 8.25% fixed while CompanyX would pay 9.4% and receive LIBOR.
b. CompanyY would pay LIBOR and receive 8.85% fixed while CompanyX would pay 8.9% and receive LIBOR.
c. CompanyY would receive LIBOR and pay 8.85% fixed while CompanyX would receive 8.9% and pay LIBOR.
d. There is not enough information to determine the swap.
9. In three to four paragraphs, discuss the differences between indirect and direct international financial intermediation. Be sure to give examples of each and highlight the factors that have contributed to the development of each, as well as their consequences for MNC operations and profitability.
10. In three to four paragraphs, discuss the services provided by financial institutions and markets to help manage the risks presented by fluctuating foreign currency rates.
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