CMC Co (Jun 14) — OpenTuition Forums

SS7y ago

Hello, I am attempting (part b) in relation to swap offered. My workings are as follow: Please can you let me know where I have exactly gone wrong? Fixed Floating CMC Co 2.2% Yield rate + 0.4% Counter Party 3.8% Yield rate + 0.8% Logically, the saving is 1.2% before the bank fees and this could also be illustrated with comparing own borrowing with swap borrowing. End Result: CMC Co 2.2% - 0.6% (saving @50% as question state "both parties will benefit equally") - 0.2% (bank fees) = 1.4% Counter Party Yield rate + 0.8% - 0.6% (savings) - 0.2% (bank fees) = Yield rate Process: CMC Co CounterParty Borrow Yield rate + 4% 3.8% SWAP Pay 3.8% Yield rate + 0.4% Rec. (2.4%) ? 0.4% ? End Result 1.4% Yield rate Where have I gone wrong in the process? Thanks

John MoffatTutor7y ago#1

You can find lectures working through the whole of this question linked from the following page: https://opentuition.com/acca/afm/afm-revision-lectures/ This will explain where you have gone wrong :-)

SS7y ago#2

Thanks for sharing this. I am not fully convince as to why floating rate is a better option than fixed rate for CMC Co in this question? CMC Co --> 2.2% and Y + 0.4% Counterparty --> 3.8% and Y + 0.8% 9 out of 10 times I would have instantly selected fixed rate based on the rates available for CMC Co and Counterparty. Plus, the question leaves it for candidate to decided rather than providing some sort of a clue. Normally, swap questions seems to provide some clue. CMC; Counterparty 2.2%; Yield + 0.8% Should this not be swapped around before CMC and subsequently counterparty pays? So, Yield + 0.8% for CMC and 2.2% for counterparty. Considering the learning topic example where the following was swapped for Co X and Co Y: Co X; Co Y LIBOR + 3%; 12% 12%; LIBOR + 3% Thanks

John MoffatTutor7y ago#3

I agree that usually there will be a 'clue' in the question, but here there was not. The problem of course is that CMC does not know what will happen in the future. If they chose to borrow floating - it could end up cheaper than fixed, or it could end up more expensive - they would therefore be taking a risk whichever they chose if a swap was not available. However, if CMC were to borrow fixed, and the counterparty were to borrow floating, then in total they would be paying 2.2 + Y + 0.8 = Y + 3% Alternatively, if CMC were to borrow floating and the counterparty were to borrow fixed, then in total they would be paying Y + 0.4 + 3.8 = Y + 4.2% Given that the question asks for how they could benefit from a swap, then the only way they could benefit is by borrowing the way in the answer and swapping.

SShaharia7y ago#4

Dear Sir, I would like to know that in this specific question the swap arrangement differential is calculated to assess the benefit of the swap CMC Co Counterparty Interest rate differential Fixed rate 2·2% 3·8% 1·6% Floating rate Yield rate + 0·4% Yield rate + 0·8% 0·4% Difference = 1.2% But in March june -17 question no. 3 b(i) why the interest rate benefit is calculated in the following manner (using benefit instead of differential)? Buryecs Co Counterparty Interest rate benefit Eurozone 4·0% 5·8% 1·8% Wirtonia Bank rate + 0·6% Bank rate + 0·4% 0·2% Gain on swap (60:40) 1·2% 0·8% 2·0%

John MoffatTutor7y ago#5

It doesn't matter how you go about calculating the benefit. Have you watched my free lectures on swaps??

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