Suppose Siemens Corporation would like to borrow fixed-rate yen and can borrow them at 4.5% or floating-rate dollars at LIBOR + 0.25%
The Singapore Development Bank would like to borrow floating-rate dollars and can borrow fixed-rate yen at 4.9% or floating-rate dollars at LIBOR + 0.8%. What is the range of possible cost savings that Siemens can realize through an interest rate/currency swap with Singapore?
What will be an ideal response?
Answer: Given the differences in rates between the two markets, the two parties can achieve a combined 15 basis point savings through Siemens borrowing floating-rate dollars at LIBOR + 0.25% and Singapore Development Bank borrowing fixed-rate yen at 4.9% and then swapping the proceeds. Siemens would be able to borrow fixed-rate yen at 4.35% if all these savings were passed along to it in the swap. This could be done by Siemens providing Singapore with floating-rate dollars at LIBOR + 0.25%, saving Singapore 0.55%, which then passed these savings along to Siemens by swapping the fixed-rate yen at 4.9% - 0.55% = 4.35%. Thus, the potential savings to Siemens range from 0 to 0.15%.
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