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Hi,
Could someone please explain how Barrow Co recieves (2.9%) and Greening Co pays 2.9% in the fixed and variable interest rate swap.
Attached the link
https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/currency-swaps.htmlIt is the missing figure to make things work.
If there was no swap and Barrow borrowed floating, then they would be paying Euribor + 1.5%. There is a gain to be made by swapping (before bank charges) of 0.8%, and so if they swap they must end up paying (before charges) Euribor + 0.7%.
So…the actually borrow fixed which means paying 3.6%. They pay Greening Euribor, so they are now paying Euribor + 3.6%. To end up paying a net Euribor + 0.7% they need to receive from Greening the difference of 2.9% (3.6 – 0.7).
(You can do the same exercise on Greening, and again the difference to make things work is 2.9%.)
It may help you to watch my free lectures on swaps.
Hi Tutor!
I dont understand why Barrow pays to Greening “Euribor” on swap?
Please explain more detailed.
Thanks in advance!It seems that the counterparty who borrows at floating rate will receive at Bank rate. Is it right?
But there is no more detail really to explain. In addition to the link that I gave in my answer to hahsleeban, have you watched my free lecture on swaps?
Sorry I havent. Which video shows Currency swap Tutor? I guess it is in Chap 18 Forex risk.
As far as the exam is concerned, the principles involved in currency swaps are the same as for interest rate swaps. For that reason they are mentioned in the chapter of our free notes on interest rate swaps.
(Although the lectures are supposed to be watched in order as a complete free course, rather than watching individual lectures at random 🙂 )
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