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Okay i think i got it. So, for the Lammer PLC (june 06 adapted) question, they havent calculated the total outcome? They didnt even calculate underhedging separately. Why?
Question- Evaluate whether or not the proposed swap might be beneficial to all parties.
Solution:
Fixed rate Floating rate
Arnbrook 6.25% LIBOR + 0.75%
BBB company 7.25% LIBOR + 1.25%Difference 1.00% 0.50%
There is a potential 0.50% arbitrage saving from undertaking the swap.
On a £50 million swap this is £250,000 per year.
Arnbrook would require 60% of any saving, or £150,000 annually. The BBB company
would receive £100,000 annually.
The bank would charge each party £90,000 per year. This would leave a net saving of
only £10,000 for the BBB?rated counterparty company.
The swap is potentially beneficial to all parties, but the counterparty company might
press for a larger saving than £10,000I personally found this explanation very confusing. Especially, the savings part. They have taken 50% of the savings and then 60% of it.
But i am relieved my solution showed in the previous reply is correct.
i think the figures are slightly different in our books. Anyway, this is the question:
Arnbrook plc is considering a £50 million three?year interest rate swap. The company
wishes to expand and to have use of floating rate funds, but because of its AA credit rating
has a comparative advantage over lower?rated companies when borrowing in the domestic
fixed?rate market. Arnbrook can borrow fixed rate at 6.25% or floating rate at LIBOR plus
0.75%.
LIBOR is currently 5.25%, but parliamentary elections are due in six months’ time and future
interest rates are uncertain. A swap could be arranged using a bank as an intermediary. The
bank would offset the swap risk with a counterparty BBB?rated company that could borrow
fixed rate at 7.25% and floating rate at LIBOR plus 1.25%. The bank would charge a fee of
£90,000 per year to each party in the swap. Arnbrook would require 60% of any arbitrage
savings (before the payment of fees) from the swap because of its higher credit ratingMy question is,
If they dont swap, they will have to pay the fixed rate of 6.25%
But if they do swap, they will pay:
1)L+0.75= 6
2) Bank charge (90,000/50,000,000)= 0.18
3) Savings of 0.3= (0.3)Total= 6+0.18-0.3= 5.88%
Therefore, it is beneficial to Arnbrook to swap.
Is this correct?
The bank would charge a fee of £90,000 per year to each party in the swap.
How did you get 0.24%? Why 120,000?Once your 3 hours are done, it’ll automatically submit the exam whether you end it or not.
People who attempted FM today? How was it?
It sucked big time for me.
Did anyone get Chemical X inventory question in Sec C?
How do you solve that?Hi, do you know which 2019 paper that is?
I am attempting my fm exam on 18th and i would like to practice it.
Thank you.Hello sir. I have a doubt in an adjustment in one of the Single Entity Financial Statement from the Kaplan Exam Kit 353-Highwood. the adjustment reads:
The inventory of Highwood was not counted until 4 April 20X1 due to operational
reasons. At this date its value at cost was $36 million and this figure has been used in
the cost of sales calculation above. Between the year end of 31 March 20X1 and
4 April 20X1, Highwood received a delivery of goods at a cost of $2.7 million and
made sales of $7.8 million at a mark-up on cost of 30%. Neither the goods delivered
nor the sales made in this period were included in Highwood’s purchases (as part of
cost of sales) or revenue in the above trial balance.The solution given is:
Inventory adjustment
Goods delivered (deduct from closing inventory) (2,700)
Cost of goods sold (7,800 × 100/130) (add to closing inventory) 6,000
Net increase in closing inventory 3,300My question is why are deducting and adding the respective amounts to closing inventory?
Also, 3300 is deducted from Cost of Sales as well, why?
