Show all computations. A Inc. is an US firm and B Inc. is an European firm. A ne
ID: 2622938 • Letter: S
Question
Show all computations.
A Inc. is an US firm and B Inc. is an European firm. A needs 10 Million Euros and B needs USD equivalent to 10 Million EUR. Current exchange rate is 1.5 USD/EUR. The cost of borrowing for each company is as follows: A can borrow in USA at 4% per annum and in Europe at 7% per annum. B can borrow in Europe at 8% and in USA at 6%. Which company has Absolute advantage in USA and Europe? Which firm has comparative advantage in USA? and in Europe? Construct an swap agreement between A and B such that both can save yearly cost of borrowing.Explanation / Answer
A has absolute advantage in USA as well as Europe as it can borrow in both places at cheaper rate.
b)Firm A has comparitive advantage in USA and Firm B has comparitive advantage in Europe
c)Firm A should borrow $15 million And B should borrow Euro 10million @ 4% and 8% respectively
Now the should exchange the Currency and enter into the swap as in A pays 7.5% to B and B pays 3.5% to A (Since benefit of swap is 1% and since nothing is given we assume an equal benefit)