Explanation:
The table suggests that the interest rate in the Japanese Yen is higher than the U.S. dollar. As per the comparative argument, Cherry has an absolute advantage in both USD and Yen.
The total gain as per the comparative advantage is equal to the difference of the difference:
Difference in USD = (5.5% - 3.5%) = 2.0%
Difference in Yen = 10.4% - 9% = 1.4%
Total gain for both companies = (5.5% - 3.5%) - (10.4% - 9%) = 0.6%
Q.718 Cherry Inc. and Sang Wang are the two market leaders in the tablet PC market. Cherry Inc. is an American company while Sang Wang is headquartered in Japan. Both companies are considering taking on debt in either USD or Yen. The following table shows the borrowing rates for both companies.
| USD | Yen | |
|---|---|---|
| Cherry Inc. | 3.5% | 9% |
| Sang Wang | 5.5% | 10.4% |
Considering the comparative advantage argument, estimate the total gain both companies can have if they enter into a currency swaps contract.
A
4.7%
B
2.2%
C
1.4%
D
0.6%
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