Question

Dell Computers would like to borrow pounds, and Virgin Airlines wants to borrow dollars. Because Dell is better known in the United States, it can borrow on its own dollars at 7 percent and pounds at 9 percent, whereas Virgin can on its own borrow dollars at 8 percent and pounds at 8.5% Suppose Dell wants to borrow £10 million for two years, Virgin wants to borrow $16 million for two years, and the current ($/£) exchange rate is $1.60. What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments.

Answer 1

Answer and Explanation:

The transaction that would accomplish this objective Assume the counterparties would exchange principal and interest payments with no rate adjustments is that Virgin would borrow £10 million for two conservatively years WHILE Dell would borrow $16 million for two years as well. The two companies would then go ahead to swap their proceeds and payment streams.

An Assume their are no interest rate adjustments, Dell would pay 8.5% on the £10 million while Virgin would pay 7% on its $16 million due to the fact that its alternative was to borrow pounds at 9%, in which Dell would inturn save 0.5% on its borrowings, or an annual savings of £50,000 and similarly Virgin winds up paying an interest rate of 7% instead of 8% which was on its dollar borrowings, saving it 1% every year.

Answer 2

Answer:

Explanation:

                        USD GBP        Prefers

Dell                     7           9         GBP

Virgin Airlines    8          8.5        USD

In a swap exchange Party A will have a relative preferred position in one money and Party B will have a bit of leeway in the other cash. For this situation Dell has a similar bit of leeway in USD getting rate and Virgin has a preferred position in GBP acquiring rate.  

Additionally note that dependent on the FICO assessments of the organization the acquiring rate will vary pulling in parties for a swap exchange.

Virgin would borrow £10 million for two years and Dell would borrow $16 million for two years. The two companies would then swap their proceeds and payment streams. Then they enter into a swap agreement to exchange their cash flows to get their preferred currency rates with an interest rate mutually benefiting both the parties.