Please help me with the simple workings of this question.

PT Co has just paid a dividend of 15 cents per share and its share price one year ago was $3.00 per share.
The total shareholder return for the year was 25%.

If they didn’t swap, X would be paying 10%. Because there is a saving of 1.5% to be shared equally, X must end up paying 10 – 0.75 = 9.25%.

When they swap X pays Y’s interest of L + 6.5%, X then receives L from Y.. So far therefore X is paying 6.5%.
In order to end up paying 9.25%, X must pay Y 9.25 – 6.5 = 2.75%.
(You can do the same thing for Y and end up with the same transfer)

However don’t worry about the arithmetic – calculations are not asked until Paper AFM. It is just being aware of the idea for Paper FM.

I have not been entirely sure what the mechanism and the real reason behind the movements (interest up and futures down and vice versa). It might have been mentioned in the lecture – sorry if I missed it. But I have found a clear explanation:

“Effect of Interest Income
The futures price decreases when there is a known interest income because the long side buying the futures does not own the asset and, thus, loses the interest benefit. Otherwise, the buyer would get interest if he or she owned the asset.”

JojoBeat says

Hi Sir, what is there to know about yield curve in interest rate risk management?

John Moffat says

For Paper FM you only need to know what is in our free notes and lectures in one of the early chapters.

TunkaraM says

Please help me with the simple workings of this question.

PT Co has just paid a dividend of 15 cents per share and its share price one year ago was $3.00 per share.

The total shareholder return for the year was 25%.

John Moffat says

But this has nothing to do with interest rate risk management!!

The lectures working through the first chapter of our free lecture notes explain your question.

JojoBeat says

Hey Sir, what’s the most important hedges for currency and interest rates for the exam?

John Moffat says

They are as I state in the lectures.

Joel1234 says

2.75 paid to x..where did you get that??

John Moffat says

It is the missing figure.

If they didn’t swap, X would be paying 10%. Because there is a saving of 1.5% to be shared equally, X must end up paying 10 – 0.75 = 9.25%.

When they swap X pays Y’s interest of L + 6.5%, X then receives L from Y.. So far therefore X is paying 6.5%.

In order to end up paying 9.25%, X must pay Y 9.25 – 6.5 = 2.75%.

(You can do the same thing for Y and end up with the same transfer)

However don’t worry about the arithmetic – calculations are not asked until Paper AFM. It is just being aware of the idea for Paper FM.

OnyinyeOfor says

Thank you Mr John for your lectures. Your explanations drives the point home

accountant-@100 says

this is great lecture

sohan1992 says

Love the way you explain with practical examples, and always have an answer for WHY

Janos says

Hi,

I have not been entirely sure what the mechanism and the real reason behind the movements (interest up and futures down and vice versa). It might have been mentioned in the lecture – sorry if I missed it. But I have found a clear explanation:

“Effect of Interest Income

The futures price decreases when there is a known interest income because the long side buying the futures does not own the asset and, thus, loses the interest benefit. Otherwise, the buyer would get interest if he or she owned the asset.”

John Moffat says

It is the missing figure.

If they did their own borrowing they would be paying 10%.

Swapping gives a saving of 1/2 x 1.5% = 0.75%.

Therefore the settling up must end up with X paying 10 – 0.75 = 9.25%

Swapping means they will be paying 12%, so they settle up by Y paying X 9.25% which means X ends up paying 12 – 9.25 = 2.75%.

Remember, however, that as I say in the lectures you cannot be asked to do this calculation in Paper FM – only to explain the idea behind swapping.

njivan28 says

hello,how did you get that 2.75 y pay to x from?