Consider two panies: Komatsu and Chrysler. Komatsu (a Japanese company) wants to

Question

Consider two panies: Komatsu and Chrysler. Komatsu (a Japanese company) wants to borrow USS for the following 6 ears at a fixed rate, while Chrysler wants for the 6 years at a fixed rate. The rates available to two companies in USS and Yen markets are shown below. ISS sler 8.60 Komatsu 10% (a) What is the total gain from the currency swap? (6 pts) (b) Which firm has the comparative advantage in Yen market, Chrysler or Komatsu? (4 pts) In part e design a currency swap with a Financial Institution as an intermediary. Suppose that the financial institution will earn 10 basis points, the remaining total gain will be split equally between Komatsu and Chrysler (c) Complete chart below. Near each arrow indicate the interest rate and the currency in which it will be paid/received. Answers must show two digits after the decimal point. (10 pts) Financial Institution . Komatsu Chrysler

Explanation / Answer

the total interest rate swap profit incurred from swapping the currency -

b. Chrysler is having the comparative advantage in Yen Market as it carries a higher interest rate level in the Yen market wheres komatsu is having lower rate and while swapping.

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