I'm trying to solve Hull's 7.2 problem for swaps. The problem says that: enter image description here

Well, my question is why Company X would need to make a swap contract if it has a good 9.6% interest rate in dollars (and it wants dollars)? The solution manual says that Company X has a comparative advantage in yen markets (I agree 5.0%<6.5%) but wants to borrow in dollars (9.6% <10%).Why? Company Y has a comparative advantage in dollar markets (?!) but wants to borrow yen. Why do they calculate the total gain like that? (6.5-5)- (10-9.6)=1.1%

  • $\begingroup$ Company X does not need to make a swap contract, but might prefer to borrow dollars at an effective rate of say $9.35\%$ rather than $9.6\%$. Your job as a financial engineer is to make something like that happen, presumably involving Company X borrowing in yen and Company Y in dollars and then having payments between them through you so you can take your cut $\endgroup$ – Henry Oct 8 '19 at 7:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.