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hi sir,
part b of the question on how cmc can benefit from the swapCMC Co Counter party
Fixed rate 2.2% 3.8%
Floating rate yield rate +0.4% yield +0.8%
the examiner model answer says:
“cmc co has a comparative advantage in borrowing at the fixed rate and the counterparty has a comparative advantage in borrowing at the floating rate.”
from what i can see, cmc co has comparative advantage in both as it has a lower fixed interest rate and a lower floating rate than the counter party but the examiner says otherwise.
why sir?
Is is comparing CMC borrowing fixed and counterparty borrowing floating, with CMC borrowing floating and counterparty borrowing fixed.
Best is if you watch my lecture working through this question. You can find it by going to the main P4 page and then choosing the link to ‘revision kit live’.
in part a lock in rate can be calculated as
(current future price + unexpired basis)
1.0659+0.0008 = 1.0667
this above formula mentioned in kaplan bookbut examiner used formula as below
(current future price – unexpired basis)
1.0659-0.0008 = 1.0651can u expalain which one is right???
The current futures price and the current spot will always get closer together, and so the lock-in rate is always between the two.
So you add or subtract depending on whichever makes it between the two.
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sorry i still dont understand how lock in rate was treated in the june 2014 Q1:
i thought if we need to estimate a futures price we use:spot at point of transaction +/- (futures now-spot now X period left from transaction to expiry of contract/period now to expiry of contract)
the spot at transaction was not given, i almost thought we could have estimated with ippt or pppt then do lock in rate. but to solve the lock in, (alternative note give in answer of Q) the spot now was used and a 4/6 rather than 2/6 basis period was used. is it that we are assuming spot stays the same? or this is another formuler?
even using the futures, i thought we are estimating it. why use it in the formula again..sorry just confused cause was comfortable with how it was explained in the video lectures
The lock-in rate is not calculated using the spot at the date of the transaction. It is calculated using the current spot and the current futures price.
It is the current spot +/- the unexpired basis, or alternatively the current futures price +/- the expired basis (both give exactly the same result). The answer to CMC does show it both ways and they both come to the same lock–in rate of 1.0651.
I have uploadede a lecture working through the whole of this question, you can find it linked from here:
https://opentuition.com/acca/afm/afm-revision-lectures/Hi John,
In CMC question, the payment is due in four months time but only 3 month expiry and 6 month expiry of futures exchange rate is given in the question.
Can we take 1.0659 as the future rate? Or do we have to calculate the rate.
What I got is,
Rate= 1.0647+(1.0659-1.0647)/6*1=1.0649But in the kit,
1.0659 +((1.0635 – 1.0659)/6*2)= 1.0651Only 3 month expiry is given, as payment is due in four months, the month should be 4m-3m=1m right?
You have made the same mistake as you made in another question you asked like this.
The difference between 3 months and 6 months is 3 months.
so what you should have written is:
1.0647 + ((1.0659 – 1.0647) / 3 ) x 1 = 1.0651
Incidentally I recorded a lecture working through the whole of this question. You can find it linked from this page:
https://opentuition.com/acca/afm/afm-revision-lectures/Hi John,
In CMC swap, I don’t understand why 60basis points is deducted? I don’t see anywhere in the question stating 60basis points.Have you watched my free lecture working through this question? You have to calculate the 60 basis points – it is an equal share of the saving to be made by swapping.
Dear sir,
Is the difference between the 2 total figures below called ARBITRAGE GAIN?
CMC borrows at float y+0.4% and counterparty borrows at fixed 3.8%, the total comes to y+4.2%if CMC borrows fixed at 2.2% and the other party borrows floating at y+0.8%, the total comes to y+3%
and after deducting the fees it will arrive at NET SAVING?
Correct 🙂
As you will have seen in the earlier replies, I recorded a lecture working through the whole of this question which you can find linked from this page:
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