Page 9 of 11 Question 4 Swaps (20 Marks) Sasol, a global chemicals and energy company listed on the Johannesburg Stock Exchange (JSE), is considering entering into an interest rate swap agreement with Mondi, a multinational packaging and paper company. Both companies want to finance their expansion with a loan of R250 million for 6 years. Sasol wants to finance an interest-rate-sensitive asset and, therefore, wants to borrow at a floating rate. Mondi wants to finance an interest-rate-insensitive asset and, thus, wants to borrow at a fixed rate. Sasol can borrow at a fixed rate of 10% or at a floating rate of JIBAR. Mondi can borrow at a fixed rate of 12% or at a floating rate of JIBAR + 0.5%. The swap dealer charges a commission of 0.50% with bid-ask quotes of 10.50% - 11.00%. Required: 4.1. Determine whether there is a swap opportunity for the companies by calculating the quality spread differential (QSD). (5 marks) 4.2. Tabulate the net cash flow for each company and determine the net saving for each company. (11 marks) 4.3. Discuss two reasons why a company would enter into a swap agreement.