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Hi John
Many thanks for the lecture on interest rate swaps.
I am reading the ACCA aticle on curreny swaps and noticed that the gain on swap is 1.6%, which is the saving from USA + EUROZONE. The lecture on interest rate swaps shows the gain as fixed – floating. Can you explain why the article adds to arrive at the gain figure and the lecture subtracts to arrive at the gain figure
thanks
They have just set it out differently (and in a less obvious way), thats all. (Although my lecture certainly does not show the gain as simply fixed – floating at all !!!!)
If G borrowed fixed and E borrowed floating, the the total interest will be (E + 1.5%) + 4.5% = E + 6%
If G borrows floating and E borrows fixed (and they swap) then the total interest will be 3.6% + (E + 0.8%) = E + 4.4%
The gain from swapping is (E + 6%) – (E + 4.4%) = 1.6%
Don’t try and simply learn rules – understand the logic and you don’t need any rules. 🙂
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