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GM and Nissan have the following current borrowing terms in their respective short-term markets. Both...

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Finance

  1. GM and Nissan have the following current borrowing terms in their respective short-term markets. Both desire a three-year loan; GM in JPY terms and Nissan in USD terms.

USD JPY

GM 4% 2%

Nissan 5% 1.5%

  1. Both agree on a swap. GM will borrow the notional principal for three years in USD from its outside lender. What rate will they pay?
  2. Nissan will borrow the notional principal in JPY for three years. What rate will they pay?
  3. In the swap, GM agrees to take the JPY and pay Nissan 1.75%. Nissan agrees to take the USD and pay GM 4.5%.
  4. What will be the net borrowing costs for each company after the swap?
  5. How much did each company save over directly borrowing in their respective markets? Diagram the flows between GM, Nissan, and their respective outside lenders using the four boxes.

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