Question
7.1) Companies A and B have been offered the following rates per annum on a $20 Million 5-year loan: Fixed Rate Floating Rate Company A
7.1)
Companies A and B have been offered the following rates per annum on a $20 Million 5-year loan:
| Fixed Rate | Floating Rate |
Company A | 5.0% | LIBOR + 0.1% |
Company B | 6.4% | LIBOR + 0.6% |
Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies
7.2
Company X wishes to borrow US dollars at a fixed rate of interest. Company Y wishes to borrow Japanese yen at a fixed rate of interest. The amounts required by the two companies are roughly the same at the current exchange rate. The companies are subject to the following interest rates, which have been adjusted to reflect the impact of taxes:
| Yen | Dollars |
Company X | 5.0% | 9.6% |
Company Y | 6.5% | 10.0% |
Design a swap that will net a bank, acting as intermediary, 50 basis points per annum. Make a swap equally attractive to the two companies and ensure that all foreign exchange risk is assumed by the bank
7.6
Explain the difference between the credit risk and the market risk in a financial contract
7.12
A financial institution has entered into a 10 year currency swap with company Y. Under the terms of the swap, the financial institution receives interest @ 3% per annum in Swiss francs and pays interest at 8% per annum in US dollars. Interest payments are exchanged once a year. The principal amounts are 7 million dollars and 10 million francs. Suppose that company Y declares bankruptcy at the end of year 6, when the exchange rate is $0.80 per franc. What is the cost to the financial institution? Assume that, at the end of year 6, the interest rate is 3% per annum in swiss francs and 8% per annum in US dollars for all maturities. All interest rates are quoted with annual compounding
7.13
After it hedges its foreign exchange risk using forward contracts, is the financial institutions average spread in figure 7.11 likely to be greater than or less than 20 basis points? Explain each answer
7.23
Under the terms of an interest rate swap, a financial institution has agreed to pay 10% per annum and to receive 3-month LIBOR in return ona notional principal of $100 million with payments being exchanged every 3 months. The swap has a remaining life of 14 months. The average of the bid and offer fixed rates currently being swapped for 3-month LIBOR is 12% per annum for all maturities. The 3-month LIBOR rate 1 month ago was 11.8% pr annum. All rates are compounded quarterly. What is the value of the swap?
7.24
Company A, a British manufacturer, wishes to borrow US dollars at a fixed rate of interest. Company B, a US multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects):
| Sterling | US dollars |
Company A | 11.0% | 7.0% |
Company B | 10.6% | 6.2% |
Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of 15 basis points per annum for each of the two companies
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started