Guido International, a German firm, can borrow money at a fixed rate of 6.2 perc

Question

Guido International, a German firm, can borrow money at a fixed rate of 6.2 percent or a variable rate based on 7 percent, plus or minus 2 percent. Guido wants a variable rate loan. Holger Worldwide, also a German firm, can borrow money at a fixed rate of 6.5 percent or a variable rate of 6.75 percent, plus of minus 1.5 percent. Holger prefers a fixed rate loan. Guido and Holger should:
Answer
a. loan each other funds based on the current LIBOR rate. b. agree to an interest rate swap. c. exchange Bulldog bonds. d. engage in covered interest arbitrage. e. exchange currencies to effectively achieve interest rate parity.

Explanation / Answer

e. exchange currencies to effectively achieve interest rate parity.

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