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John Moffat.
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- May 6, 2017 at 3:33 pm #385102
Hi
I am very much confused about the currency swap solving techniques. the kaplan and Bpp exam kit has different approaches, the book example is completely different and the online videos made me even more confused.
do we show the swap of principal amount as well or not? and how to calculate the effective rate?
P.Questions on Keshi co (kaplan kit) and Currency swap (kaplan kit)
May 6, 2017 at 5:40 pm #385120I only have the BPP Revision Kit (not Kaplan) and so I can only help you on Keshi (which was a past exam question).
Unless Kaplan have changed the question in their Exam Kit, then Keshi was an interest rate swap – not a currency swap.
There are several ways you could approach the question (all with the same final outcome) and this may be of help to you:Without the swap, if borrowing fixed then Keshi would have paid 5.5%
There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46%Therefore Keshi must end up paying 5.5% – 0.46% = 5.04%.
But because of swapping, Keshi borrows floating and pays L + 0.4%
To make things ‘work’ the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% – L = 0.4%
Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges – the remainder is 4.94%
So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%
Had it been a currency swap, then whether or not the principal (and the final repayment) need to be swapped would have to be told in the question – you would need to be told what the agreement was as regards to what was swapped, and at what exchange rates.
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