AUD Problem Two: (15 Points) - Swaps Transactions Company X and Company Y have the following access to a 10Y fixed rate

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Aud Problem Two 15 Points Swaps Transactions Company X And Company Y Have The Following Access To A 10y Fixed Rate 1 (32.45 KiB) Viewed 31 times

AUD Problem Two: (15 Points) - Swaps Transactions Company X and Company Y have the following access to a 10Y fixed rate borrowing in USD and AUD and both companies want to borrow roughly USD10 million at current exchange rate in either AUD or USD. USD Company A 5.0% 7.6% Company B 7.0% 8.0% A swap will go through an intermediary that will earn 0.2% and meets the following conditions: 1) Each company borrows in the currency in the they have a comparative advantage but pays fixed in the other currency; 2) No currency exposure for the companies (ie, a company cannot receive and pay in the same currency at different rates) though the intermediary may have currency exposure: 3) The net gains from the swap are shared equally for the two borrowers What currency will each party borrow and at what rate? If five years into the swap Company B defaults what would be the potential cost of this and who would bear it?