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Problem:
(a) Critically analyse interest rate swap and currency swap.
(b) Explain why a bank may face credit risk when it enters into offsetting swap contracts.
(c) Two companies Toyota and Ford have been quoted the following interest rates. The quoted rates have been adjusted to reflect the differential impact of taxes.
(i) Which company appears to be more credit worthy? Justify your answer.
(ii) In which currency does Toyota have a comparative advantage?
(iii) Suppose that Toyota wants to borrow in Dollars and Ford in Japanese Yen at fixed interest rates. Design a swap that will net a bank, acting as intermediary, 0.5% per annum. The swap is designed so as to make it equally attractive to both companies.
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