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with reference to the examiners article on currency swaps, can you please explain how they arrived at a fixed rate of 2.9%? Am I right to say that the interest of 2.9% received by Barrow is the difference between the USA borrowing rate of 3.6% and the benefit of 0.7%?
Thank you in advance.
Yes it is 🙂
If Barrow did their own floating rate borrowing, then they would pay E + 1.5%.
Since there is a saving through swapping of 0.8% each (before the bank fee), they must end up paying E + 0.7% (before the bank fee).
In order to do the swap they borrow fixed at 3.6%, they pay E to Greening (so they are now paying in total E + 3.6%) and so to end up paying E + 0.7% they must receive from Greening 3.6 – 0.7 = 2.9%
Hi John, pls, on this same topic, in examiner`s answer Q1 june, 2014 and Q2 december, 2014.
to calculate the overall benefits examiner used the difference between total fixed rates and total floating rates but in the Technical Article, currency swap he difference was added. I thought it should be
3.6% 4.5% =0.9%
E+1.5% E+0.8% =0.7%
overall gain =0.2%
but instead, the difference was added as 1.6%.
It is much simpler and easier to do it the way that I do in my lectures.
One borrows fixed and the other borrows floating.
One way round gives a total of: (E + 1.5) + 4.5 = E + 6%
The other way round (and then swapping) gives a total of 3.6 + (E + 0.8) = E + 4.4%
The difference between the two totals is 6 – 4.4 = 1.6% and this is the gain to be made by swapping.