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Hello,
I’m struggling again… this time with IR swaps.
I’ve noticed that some questions do not mention which party prefers fixed interest/floating interest.I see in the Answers (marking guide) that the initial decision of who is choosing fixed/floating is marked, so I would be wrong to assume that Fitzharris would look for fixed, because he is looking for some certainty/ hedging operations.
Therefore, when looking at the full answer, in a first instance it says: ‘Fitzharris has an advantage in borrowing at both fixed and floating, but the floating rate advantage is larger.’ So, I would have expected that, in the end, the target rate for Fitzharris to be floating.
However, I had a surprise… net result is fixed, not floating.
Could you please support me in understanding what I’m missing in the rationale?
Many thanks.
AndreeaAccording to the question Fitzharris can currently borrow at floating rate. However this presents risk because the base rate might change and therefore the interest they will pay is not certain.
To remove this risk they can exercise a swap and end up paying a fixed rate as a result.
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