Pepper Corp. wants to finance an investment worth an amount equivalent to USD 185 million. It can borrow fixed-rate JPY at a rate of 4.56%, or it can borrow floating-rate USD at LIBOR + 0.25%. Truffles Corp. also faces a USD 185 million investment, and it can borrow fixed-rate JPY at a rate of 4.8%, or it can borrow floating-rate USD at LIBOR + 0.88%. Pepper Corp. would like to borrow fixed-rate JPY and Truffles Corp. would like to borrow floating-rate USD. What are the possible cost savings to Pepper Corp. in INR terms from a swap agreement if Westpac charges a fee of 8 basis points to arrange the swap? Assume all remaining cost savings accrue to Pepper Corp. Assume the current exchange rate is JPY75/USD. a. 43.0125 million b. 0.0096 million c. 54.1125 million d. 0.0076 million e. There are no cost savings to Pepper Corp. from a swap.

Pepper Corp. wants to finance an investment worth an amount equivalent to USD 185 million. It can borrow fixed-rate JPY at a rate of 4.56%, or it can borrow floating-rate USD at LIBOR + 0.25%. Truffles Corp. also faces a USD 185 million investment, and it can borrow fixed-rate JPY at a rate of 4.8%, or it can borrow floating-rate USD at LIBOR + 0.88%. Pepper Corp. would like to borrow fixed-rate JPY and Truffles Corp. would like to borrow floating-rate USD. What are the possible cost savings to Pepper Corp. in INR terms from a swap agreement if Westpac charges a fee of 8 basis points to arrange the swap? Assume all remaining cost savings accrue to Pepper Corp. Assume the current exchange rate is JPY75/USD. a. 43.0125 million b. 0.0096 million c. 54.1125 million d. 0.0076 million e. There are no cost savings to Pepper Corp. from a swap.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Smart Banking Corp. can borrow $5 million at 6 percent annualized. It can use theproceeds to invest in Canadian dollars at 9 percent annualized over a 6-day period. TheCanadian dollar is worth $.95 and is expected to be worth $.94 in 6 days. Based on thisinformation, should Smart Banking Corp. borrow U.S. dollars and invest in Canadiandollars? What would be the gain or loss in U.S. dollars?
The Sandbox's Company has cash needs of P5 million per month. If Sandbox needs more cash, it can sell marketable securities, incurring a fee of P300 for each transaction. If Sandbox leaves its funds in marketable securities, it expects to earn approximately 0.50% per month on their investment. If Sandbox gets a cash infusion of P1 million each time it needs cash, what are the holding costs associated with its cash investment?
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A commercial bank has $200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of fixed-rate deposits costing 9 percent. A savings bank has $200 million of mortgages with a fixed rate of 13 percent. They are financed with $200 million in CDs with a variable rate of T-bill rate plus 3 percent. Propose a swap that would result in each institution having the same type of asset and liability cash flows.
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Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Lending Rate Borrowing Rate U.S. dollar 7.0% 7.2% Singapore dollar 22.0% 24.0% Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market a nd investing the funds in dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?
Suppose that one of the inducements provided by Taiwanto woo Xidex into setting up a local production facility is a10-year, $12.5 million loan at 8% interest. The principalis to be repaid at the end of the tenth year. The marketinterest rate on such a loan is about 15%. With a marginaltax rate of 40%, how much is this loan worth to Xidex?
Suppose the Philadelphia investor needs fixed rate funds which are available at the rate of 7.875% to be computed half yearly but it has access to cheaper floating rate funds available locally to it at LIBOR + 0.225%. The Bolivian firm investor in South America also needs floating-rate funds available to it at a six-month LIBOR flat but has access to cheaper fixed-rate funds available to it at the rate of 9.5% to be computed half yearly. Both the principal investors are identical in size on maturity and are in the same currency. Design how the interest rate swap takes place.

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