A Inc. and B Inc. intend to borrow $ 200,000 and $ 200,000 in ¥ respectively for a time horizon of one year. The prevalent interest rates are as…

Opportunity gain of A Inc under currency swap Receipt Payment Net Interest to be remitted to B. Inc in $ 2,00,000 x 9% = $18,000 ¥21,60,000 Converted into ($18,000 x ¥120) Interest to be received from B. Inc in $ converted into ¥ (6% x $2,00,000 x ¥120) ¥14,40,000 Interest payable on ¥ loan ¥12,00,000 ¥14,40,000 ¥33,60,000 Net Payment ¥19,20,000 ¥33,60,000 ¥33,60,000 $ equivalent paid ¥19,20,000 × (1/¥120) $16,000 Interest payable without swap in $ $18,000 Opportunity gain in $ $ 2,000 Opportunity gain of B inc under currency swap Receipt Payment Net Interest to be remitted to A. Inc in ($ 2,00,000 x 6%) $12,000 Interest to be received from A. Inc in ¥ converted into $ = ¥ 21,60,000/¥120 $18,000 Interest payable on $ loan@10% $20,000 Net Payment $18,000 $32,000 $14,000 $32,000 $32,000 ¥ equivalent paid $14,000 X ¥120 Interest payable without swap in ¥ ($2,00,000 X ¥ 120 X 8%) Opportunity gain in ¥ Alternative Solution Cash Flows of A Inc (i) At the time of exchange of principal amount Transactions Cash Flows Borrowings $2,00,000 X ¥120 + ¥240,00,000 Swap - ¥240,00,000 Swap + $2,00,000 Net Amount + $2,00,000 (ii) At the time of exchange of interest amount Transactions Cash Flows Interest to the lender ¥240,00,000 X 5% ¥12,00,000 Interest Receipt from B Inc. ¥2,00,000 X 120 X 6% ¥14,40,000 Net Saving (in $) ¥2,40,000/¥120 $2,000 Interest to B Inc. $2,00,000 X 9% -$18,000 Net Interest Cost -$16,000 A Inc. used $2,00,000 at the net cost of borrowing of $16,000 i.e., 8%. If it had not opted for swap agreement the borrowing cost would have been 9%. Thus, there is saving of 1%. Cash Flows of B Inc (i) At the time of exchange of principal amount Transactions Cash Flows Borrowings + $2,00,000 Swap - $2,00,000 (ii) At the time of exchange of interest amount Transactions Cash Flows Interest to the lender $2,00,000X10% $20,000 Interest Receipt from A Inc. +$18,000 Net Saving (in ¥) -$2,000X¥120 - ¥2,40,000 Interest to A Inc. $2,00,000X6%X¥120 - ¥14,40,000 Net Interest Cost - ¥16,80,000 B Inc. used ¥240,00,000 at the net cost of borrowing of ¥16,80,000 i.e. 7%. If it had not opted for swap agreement the borrowing cost would have been 8%. Thus, there is saving of 1%.