Explanation:
| X | Y | Difference | |
|---|---|---|---|
| Dollar | 10.5% | 9.3% | 1.2% |
| Yen | 8% | 9% | –1% |
X has a comparative advantage in Yen borrowing;
Y has a comparative advantage in Dollar borrowing;
When a comparative advantage exists, the implication is that the parties involved can reduce their borrowing costs by entering into a swap agreement. The net borrowing savings (maximum gain) by entering into a swap is the difference between the differences:
ΔDollar – ΔYen
= 1.2% – (–1%) = 2.2%
Q.3558 Company X seeks a 4-year fixed-rate US dollar funding while Company Y seeks a 4-year fixed-rate Japanese yen funding. Company X's direct borrowing all-in-cost is 10.50% in dollars and 8% in Japanese yen. Company Y's direct borrowing all-in-cost is 9.30% in dollars and 9% in Japanese yen. What is the maximum gain for all parties involved through this swap?
A
2.2%
B
1%
C
1.2%
D
0.2%
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