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Please show steps Two companies would like to borrow to take advantage of their comparative...

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Finance

Please show steps

Two companies would like to borrow to take advantage of their comparative advantages and then swap. Both companies have positive NPV investments they will be making but would like to ensure they have the lowest cashflows out for their borrowings for that investment.

  1. Yoshihiro wants to finance its American project in USD. Thomasina wants to finance its Japanese project in JPY. Here are the borrowing terms for each company

USD rate

JPY rate

Yoshihiro

9%

4%

Thomasina

8%

2%

  1. Which corporation is the most credit worthy? Why does it have an absolute advantage?
  2. Which company has comparative advantage in the USD rate market? Why is this usually the case?
  3. A Swap Dealer provides a swap offer. Yoshihiro will pay 7.6% in USD and will get 2% in JPY. Thomasina will pay 3.6% in JPY and receive 9% in USD. Evaluate the Swap for both companies. Will they accept this deal? What is unusual about this deal?

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