Question

Jujji Co., a Japanese manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest.  Puppi Co., a U.S. multinational, wishes to borrow yen at a fixed rate of interest.  They have been quoted the following rates per annum (adjusted for differential tax effects):

	Japanese Yen	U.S. Dollar
Jujji Co.	12%	8.3%
Puppi Co.	13%	9.0%

Design a swap that will net an intermediary 10 basis points and will be equally advantageous to both companies.

Answer 1

HERE, WE SEE THAT PUPPY CO. HAS COMPARATIVELY MORE ADVANTAGE IN BORROWING US DOLLARS.

SO PUPPI CO. WILL BORROW US DOLLAR @9%, WHERE AS JUJJI CO. WILL BORROW JAPANESE YEN @ 12%

THE DIFFERENCE BETWEEN JAPANESE YEN IS 1% AND US DOLLAR IS 0.7%, WHICH IMPLIES NET GAIN OF 0.3%, OUT OF WHICH 0.1% WILL BE GIVEN TO SWAP DEALER & REMAINING WILL BE DIVIDED EQUALLY BETWEEN 2 COMPANIES, WHICH IS 0.10%

SWAP WILL WORK AS FOLLOWS :

JUJJI CO ----> BORROWS IN JAPANESE YEN = COST = 12%

HIS BORROWING IS 3.7% HIGHER THAN IF HE WOULD HAVE BORROWED IN US DOLLAR

SO PUPPY CO. WILL PAY HIM 3.7% + 0.1% = 3.8%

SO HIS NET COST = 12% - 3.8% = 8.2%

ON THE OTHER SIDE, PUPPY CO -------> BORROWS IN US DOLLAR =COST = 9%

HIS BORROWING IS 4% CHEAPER THAN IF HE WOULD HAVE BORROWED IN JAPANESE YEN

OUT OF THIS, HE WILL PAY 3.7% + 0.1% = 3.8% TO JUJJI.CO AND 0.1% TO INTERMIDEARY

SO HIS NET COST = 9% +3.8%+0.1% = 12.9%

SO BOTH HAS EFFECTIVELY SAVED 0.1% BY DOING SWAP