Answer to Question #229351 in Economics for Dora

Question

Fortune Ltd is a US based multinational corporation has its subsidiary in India and

David Brothers Ltd is a New Delhi based company has its subsidiary in New York.

Both companies have a requirement to raise funds for their subsidiaries for working

capital needs. Fortune Ltd requires INR 50 million whereas David Brothers Ltd

requires USD 75 million at the current spot rate of INR 72.93/USD. Fortune Ltd can

issue three year Bonds in US capital market at 12% fixed rate and three year bonds in

the India at LIBOR + 0.1%, i.e., floating rate. David Brothers Ltd can issue three year

US bonds in US market at 13.40% fixed rate and INR Bonds in India at LIBOR +

0.6%, i.e., floating rate. Fortune Ltd is almost preferring to go with borrowing in India

and David Brothers is about to finalize a proposal to issue bonds in US.

a.) Is there a swap that both companies can get into and benefit?

b.) Compute the total cost for both parties if the swap is equally attractive to both the

parties?

Answer 1

$$\frac{50}{72.93}=0.686$$

Both parties will benefit if they transfer money to Indian rupees, since there is a floating rate.

$$75\times72.93=5469.75$$

$$5469.75\times0.12=656.37$$