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

R$250$ 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 $+0\mathrm{.}5\%.$ The swap dealer charges a commission

of $0\mathrm{.}50\%$ with bid$-$ask quotes of $10\mathrm{.}50\%-11\mathrm{.}00\%.$

Required:

$4\mathrm{.}1.$ Determine whether there is a swap opportunity for the companies by calculating the quality

spread differential $($QSD$).(5$ marks$)$

$4\mathrm{.}2.$ Tabulate the net cash flow for each company and determine the net saving for each

company. $(11$ marks$)$

$4\mathrm{.}3.$ Discuss two reasons why a company would enter into a swap agreement. $(4$ marks$)$