Finance ABC is currently paying 7.5% fixed rate on S$10m. ABC can borrow at LIBOR. XYZ is paying LIBOR + 0.8% on S$10m. XYZ can borrow fixed at 9.5%. ABC and XYZ agree to swap interest payments to take advantage of the arbitrage created by their respective interest rate differentials. Which of the following is correct? A. ABC ends up paying LIBOR - 0.6%, XYZ ends up paying 8.9% B. ABC ends up paying 7.5%, XYZ ends up paying LIBOR + 0.8% C. ABC ends up paying LIBOR, XYZ ends up paying 9.5% D. None of the above

Finance ABC is currently paying 7.5% fixed rate on S$10m. ABC can borrow at LIBOR. XYZ is paying LIBOR + 0.8% on S$10m. XYZ can borrow fixed at 9.5%. ABC and XYZ agree to swap interest payments to take advantage of the arbitrage created by their respective interest rate differentials. Which of the following is correct? A. ABC ends up paying LIBOR - 0.6%, XYZ ends up paying 8.9% B. ABC ends up paying 7.5%, XYZ ends up paying LIBOR + 0.8% C. ABC ends up paying LIBOR, XYZ ends up paying 9.5% D. None of the above

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 4P

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Similar questions

A company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?
You are an analyst at a local bank and one of your corporate customers is interested in fixed rate USD funding. Your bank desires TTD funding. The following borrowing costs are available: BORROWING COSTS Local FIRM Local BANK FIXED USD 6% 4.5% FLOATING USD LIBOR + 1% LIBOR FIXED TTD 4% 3.5% A Can a swap be structured that benefits both parties? Illustrate how a swap can be structured to benefit both partied and calculate the effective rates assuming gains are divided equally?
2. Companies A and B have been offered the following rates per annum on a $20 million five-year loan: Company A Company B Fixed Rate 5.0% 6.4% Floating Rate LIBOR+0.1% LIBOR+0.6% Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will appear equally attractive to both companies. Answer the question by using excel and explain what did you do in all the parts.
15. The table below presents the costs of borrowing for Caterpillar and Tesla, and the a Swap Bank quote against LIBOR. Caterpillar would like to get a $5,000,000.00 floating rate loan. Tesla would like to get a $5,000,000.00 fixed rate loan. How much can Tesla save each year by entering a swap agreement? (a) $37,000 (b) $9,500 (c) $8,000 (d) $27,500 Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Caterpillar Tesla 3.00 6.50 LIBOR LIBOR +2.60 Swap Bank Quote Bid Ask 3.19% 3.74% (e) None of the above
Use the following information for the next two questions. Firms X and Y have the following borrowing costs: Company X Company Y Fixed-Rate Borrowing Costs Floating-Rate Borrowing Costs 9.5% 7.5% LIBOR +1.25% LIBOR A swap bank offer the following quote for an interest only swap: 7.1-7.6 (against LIBOR) 1) X wants a fixed loan. What would be their all in cost if instead of getting a fixed loan directly they initially get a floating loan and swap it using the above quote? a. 8.5% b. 8.85% C. 8.95% d. 8.65% e. None of the above
(Motivation for Interest rate swap) National Bank has a $200b Adjustable Rate Mortgage (ARM) as a liability on its balance sheet. The interest rate on the ARM is 2.34%+Libor. As a result, the bank will have to pay floating interest. The bank is considering hedging the risk in the interest payment to the ARM with a three-year interest rate swap. What will be the Bank's net interest rate of payment if it chooses the right swap? Answer: ____________%. Euro-€ Swiss franc U. S. dollar Japanese yen Years Bid Ask Bid Ask Bid Ask Bid Ask 2 3.08 3.12 1.68 1.76 5.43 5.46 0.45 0.49 3 3.25 3.29 2.41 2.68 5.78 6.02 0.56 0.59
Suppose that Phoenix bank seeks to reduce its interest rate risk in regards to its holdings of fixed-rate (10%) mortgages via the use of interest rate swaps. To this end, Phoenix and Epitome bank come to an agreement of a swap arrangement, whereby Epitome receives fixed-rate payments from Phoenix's mortgages, equaling 8%. In exchange, Phoenix receives variable payments from Epitome, equaling the LIBOR rate (the interbank lending rate for Eurobanks). Assume that Phoenix's cost of funds (or the rate owed on its deposits) is equal to the LIBOR rate, less 1%. The following table details the swap arrangement from the point of view of Phoenix bank for various possible values of LIBOR. Possible Future LIBOR Rates Unhedged Strategy 7% 8% 9% 10% 11% 12% Average rate on existing mortgages 10% 10% 10% 10% 10% 10% Average cost of deposits 5 6 7 8 9 10 Spread 5 4 3 2 1 0 Hedging with Interest Rate Swap Fixed interest earned on fixed-rate mortgages 10% 10% 10% 10% 10% 10% Fixed interest owed on swap…
9) Find the maximum value of no arbitrage forward bid price and the minimum value of no arbitrage forward ask price by using the following information. Interest rates: = 7% for borrowing 2% for borrowing ¡USD iJPY Exchange rates: Spot Forward BID 0.0110 USD/JPY Fb = ? 6% for lending 1% for lending ASK 0.0125 USD/JPY Fa = ?
Answer a) and b) Problem 3: Interest Swap Companies A and B have been offered the following rates per annum on a $50 million five-year loan: Company A Company B Floating LIBOR +0.7% LIBOR +1.0% Fixed 6.0% 7.5% Company A requires a floating-rate loan and company B requires a fixed-rate loan. a) Design a swap that will net a bank, acting as an intermediary, 30 basis points (0.3%) per annum and that is equally attractive to the two companies. Illustrate the swap with a diagram. b) Determine the effective financing costs for A and B.
The table below presents the costs of borrowing for Microsoft and Tesla, and the aSwap Bank quote against LIBOR. Microsoft would like to get a $3,000,000.00 floating rate loan. Tesla would like to get a $3,000,000.00 fixed rate loan. How much can the swap bank profit from entering into a swap agreement with Microsoft and another withTesla? Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Microsoft Tesla Swap Bank Quote 4.00 8.50 Libor Libor+4.40 Bid Ask 4.05% 4.08% O $2,400 O None of the alternatives O $600 $1,500 $900
Consider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $ ? million is 1 − ?. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan.
Company H is a high credit-worthy borrower. Company L is a low credit-worthy borrower. Their preference, status, and borrowing opportunities are shown below: Company Preferred Currently Floating Rate Borrowing Cost Fixed Rate Rate Borrowing at. Borrowing Cost H. Floating Fixed 4.25% PRIME Fixed Floating 6.25% PRIME + 0.50% Suppose the OSD is equally shared between H, L and the swap dealer. If the swap dealer receives PRIME from H, what should the swap dealer pay to H? O Prime- 0.75 % O Prime + 0.33% 4.25% 4.75%.