We must establish absolute advantage and comparative advantage between 2 counter parties.
Situation (Hypothetical, where either of the parties have better rates in the 2 categories)
Party A:
Fixed: 10%; Floating: L+1%
Party B:
Fixed: 8%; Floating: L+2%
Party A has absolute advantage in floating and comparative in fixed, and vice-versa for Party B. In such a situation, how would the advantages be determined?
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ACCA P4, interest rate swaps
9y ago#1If A borrows fixed and B borrows floating, then the total is 10 + L+2 = L + 12%
If A borrows floating and A borrows fixed, then the total is L+1 + 8 = L + 9%
Therefore there is 3% to be saved by swapping.
Have you watched my free lectures on swaps?
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