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a 2. A hedge fund is evaluating investment in two securities of the same European firm. A five-year, fixed-rate note pays a fixed rate of
a 2. A hedge fund is evaluating investment in two securities of the same European firm. A five-year, fixed-rate note pays a fixed rate of 3.00% (US custom of semi-annual payment) while a five-year floating-rate note pays six-month Euro Interbank Offer Rate (Euribor) + 130 basis points (1.30%). Five-year, euro-denominated swaps based on the six-month floating rate are priced with a fixed rate of 1.65% (asked) for fixed-rate payers and 1.60% (bid) for floating-rate payers. Is there any opportunity to achieve a higher fixed- or floating-yield via use of the swap market? Evaluate the transaction as an investment or asset. How should the cash markets react, if at all, to the pricing of the two securities and swaps? a 2. A hedge fund is evaluating investment in two securities of the same European firm. A five-year, fixed-rate note pays a fixed rate of 3.00% (US custom of semi-annual payment) while a five-year floating-rate note pays six-month Euro Interbank Offer Rate (Euribor) + 130 basis points (1.30%). Five-year, euro-denominated swaps based on the six-month floating rate are priced with a fixed rate of 1.65% (asked) for fixed-rate payers and 1.60% (bid) for floating-rate payers. Is there any opportunity to achieve a higher fixed- or floating-yield via use of the swap market? Evaluate the transaction as an investment or asset. How should the cash markets react, if at all, to the pricing of the two securities and swaps
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