Answer: Borrow at USD 4.8% and, with regard to swap, pay EUR at 6.1% and receive USD at 4.8%

This is a comparative-advantage currency swap. - Company A can borrow at 5.0% in EUR or 4.0% in USD. - Company B can borrow at 6.2% in EUR or 4.8% in USD. The spread differential is: - EUR difference: 6.2% - 5.0% = 1.2% - USD difference: 4.8% - 4.0% = 0.8% - Total potential gain = 1.2% - 0.8% = 0.4% - Less intermediary fee = 0.2% - Remaining gain = 0.2% - Split equally = 0.1% each Company B should borrow in the market where it has the comparative advantage relative to its needs and then swap into the desired currency. Since it wants EUR funding, it borrows USD at 4.8% and swaps so that it effectively ends up with an EUR cost 0.1% below direct EUR borrowing. The swap leg consistent with that is: - pay EUR 6.1% - receive USD 4.8% So the correct answer is **C**.

Author: Manit Arora