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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 rateProcess:
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 rateWhere have I gone wrong in the process?
Thanks
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 🙂
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
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.
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%
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