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Question 3 a) Feliz Plc is a UK-based pharmaceutical firm. The company is intending to expand its services internationally and is looking to build factory in the United States of America (USA) to serve the North and South American market. In order to finance the project, the company wishes to raise a 5-year $170 million fixed rate loan Jemaima's bankers have advised the company the following rates could be obtained Floating: LIBOR +4.0% Fixed 6.5% The bank has also identified a SWAP partner (Petball Plc), in the U.S.A., who has been offered similar loans at the following rates: Floating: LIBOR +3.0% Fixed: 5.0% The bank would charge a fee of 0.18% per annum for the arrangement. The average exchange rate after the 5-year period is expected to be $1.43/1 Continued... 5 100% Continued 5 7035EFA-R Required From the information given above, create SWAP terms to illustrate how Feliz Pic could benefit by entering into a SWAP arrangement with Petball Plc, and forecast the total saving in interest payments over the 5-year period. (Clearly state all assumptions) (22 marks) b) Explain THREE advantages and disadvantages of using interest rate swaps for Feliz Pic (6 marks) c) The management of Feliz Plc considers using currency SWAP in future. As the finance analyst of the firm, write a memo to the management (1) Explaining what a currency SWAP is; and (ii) discussing FOUR possible benefits and potential problems of using currency swaps. (12 marks) (Total 40 marks) [Total word count - 1,400] END Question 3 a) Feliz Plc is a UK-based pharmaceutical firm. The company is intending to expand its services internationally and is looking to build factory in the United States of America (USA) to serve the North and South American market. In order to finance the project, the company wishes to raise a 5-year $170 million fixed rate loan Jemaima's bankers have advised the company the following rates could be obtained Floating: LIBOR +4.0% Fixed 6.5% The bank has also identified a SWAP partner (Petball Plc), in the U.S.A., who has been offered similar loans at the following rates: Floating: LIBOR +3.0% Fixed: 5.0% The bank would charge a fee of 0.18% per annum for the arrangement. The average exchange rate after the 5-year period is expected to be $1.43/1 Continued... 5 100% Continued 5 7035EFA-R Required From the information given above, create SWAP terms to illustrate how Feliz Pic could benefit by entering into a SWAP arrangement with Petball Plc, and forecast the total saving in interest payments over the 5-year period. (Clearly state all assumptions) (22 marks) b) Explain THREE advantages and disadvantages of using interest rate swaps for Feliz Pic (6 marks) c) The management of Feliz Plc considers using currency SWAP in future. As the finance analyst of the firm, write a memo to the management (1) Explaining what a currency SWAP is; and (ii) discussing FOUR possible benefits and potential problems of using currency swaps. (12 marks) (Total 40 marks) [Total word count - 1,400] END
