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Dear John,
Can you please briefly explain why the examiner calculated the interest to be paid in the options question by using 5.6% and not 5.1% (“LIBOR is currently 4.5% but is expected to rise by up to 0.6% between now and 1 September”)?
Thank you so much for your help!
Best regards,
MargaritaDear John,
And another question regarding Swap arrangement of Lurgshall Co.
If the text does not mention whether a company wants to borrow fixed or floating and just says that the company and the counterparty can borrow at certain interest rates, how should we know what OWN borrowing should be of the company and the counterparty?Thanks again!
First question:
The question says that they will be borrowing at LIBOR + 50 basis points (i.e. + 0.5%)
Second question:
The fact that prior to considering hedging or swapping they are planning to borrow at variable rate, means that the purpose of swapping for them would be to change it to a fixed rate. (Also, if it is ever not clear in the question, then swaps can only be beneficial one way round. If they had swapped the other way then there would not have been a gain.)
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