Answer-first summary for fast verification
Answer: GE pays AUD 5.70% and QA pays USD 5.50%
The total gain available from the swap is the difference in the parties’ comparative borrowing advantages: - GE’s advantage in USD vs. AUD = 6.20% − 4.00% = **2.20%** - QA’s advantage in AUD vs. USD = 7.00% − 6.00% = **1.00%** So the **total potential gain** from the swap is: **2.20% − 1.00% = 1.20%** The intermediary charges **0.20%**, leaving: **1.20% − 0.20% = 1.00%** If GE and QA share the remaining gain equally, each receives: **1.00% / 2 = 0.50%** Therefore: - GE’s effective AUD borrowing cost = 6.20% − 0.50% = **5.70%** - QA’s effective USD borrowing cost = 6.00% − 0.50% = **5.50%** So the correct choice is **C**.
Author: Manit Arora
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Q-723.2. Suppose the five-year fixed-rate borrowing costs to General Electric (GE) and Qantas Airways (QA) in U.S. dollars (USD) and Australian dollars (AUD) are given as shown in the table below:
| USD | AUD | |
|---|---|---|
| General Electric (GE) | 4.00% | 6.20% |
| Quantas Airways (QA) | 6.00% | 7.00% |
Although GE has a comparative advantage in the USD market, QA has a comparative advantage in the AUD market. However, GE wants (or is willing) to borrow Australian dollars and QA wants (or is willing) to borrow US dollars:
The AUD/USD exchange rate is AUD/USD $0.80 (ie, $0.80 USD per 1.0 AUD) and both want to borrow AUD 20.0 million. The currency swap's financial intermediary will charge 20 basis points (0.20%) and can hedge its currency risk (put another way, the financial intermediary is willing to assume the currency risk). If GE and QA want to share equally the gains enabled by the swap, which of the following currency swap best achieves this?
A
GE pays USD 5.60% and QA pays AUD 5.40%
B
GE pays AUD 5.60% and QA pays USD 5.40%
C
GE pays AUD 5.70% and QA pays USD 5.50%
D
GE pays AUD 6.10% and QA pays USD 5.90%
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