Question
Silverman Sachs has entered into a five year SWAP contract agreeing to pay a fixed rate of 4.75% per year and receive LIBOR in return.
Silverman Sachs has entered into a five year SWAP contract agreeing to pay a fixed rate of 4.75% per year and receive LIBOR in return. Silverman Sachs can purchase Government bonds with a coupon of 4.63% per year and the purchase of the Government bonds can be financed at the REPO rate (floating rate). The REPO rate is set to LIBOR – 12 bps. Can Silverman Sachs make an arbitrage profit (ignore transaction costs?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To determine whether Silverman Sachs can make an arbitrage profit from this swap arrangement lets break down the components of the transaction Swap Co...
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Step: 2
Step: 3
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Advanced Accounting
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng
11th edition
538480289, 978-0538480284
