- March 5, 2020 at 1:48 pm #564384mks2016Member
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In q.3 part b (i) mar/jun 17 exam how did was the amount of 4.6 % paid by the counterpart and amount received (4.6%) by buryec calculated? I kept getting a different figure while doing the question
Thanks,March 5, 2020 at 3:36 pm #564411John MoffatKeymaster
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It is the missing figure to make sure that the end result is what is required (although I hate the way the examiner has set out his answer!).
Buryecs is to make a gain on swapping of 0.9% (from the earlier workings).
If they didn’t swap and borrowed floating themselves they would pay Bank Rate + 0.6%.
Therefore by swapping they must end up paying BR + 0.6% – 0.9% = BR – 0.3% (which is what the examiner states below his workings).
To achieve this they actually borrow fixed and pay 4%. There are several ways that they could arrange the swap but the most common way would be for them to pay the counterparty BR and for the counterparty to pay them fixed.
If they borrow fixed, and pay the counterparty BR and they paid the bank fee of 0.3%, they would then be paying 4% + BR + 0.3% = 4.3% + BR.
To end up with the desired result of paying BR – 0.3%, the amount they will need to receive from the counterparty has to be 4.6% (which means the end result is 4.3% + BR – 4.6% = BR – 0.3%)
You could do the same sort of workings for the counterparty and end up with the same ‘missing figure’, but there was no need to do both in the exam 🙂
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