Currency swaps-terms of spread

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Reference no: EM13117244

In the cash market, an American Bank (A) can issue either yen 1 billion worth of bonds yielding 5.3% p.a. and priced at par or $10 million worth of bonds yielding 6.5% p.a. and priced at par.

At the same time, a Japanese bank (B) can either issue yen 1 billion worth of bonds yielding 5.5% p.a. and priced at par of $10 million worth of bonds yielding 6% p.a. and priced at par.

Current yen dollar rates are $0.01/yen.

After the swap, the American Bank prefers to make payments in Dollars, and the Japanese Bank prefers to make payments in Yen .

All interest payment are annual. An intermediary has concluded a swap deal for both banks. Assume a maturity of 7 years.

If a swap intermediary fee is 30 basis points (US$) and both (A) and (B) gain 20 points from the swap, what are the terms of the spread? Show all payments!

Reference no: EM13117244

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