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Good afternoon,
I am looking at the Currency Swaps Article on the ACCA website. In the section where it shows that Barrow Co receives (2.9%) and Greening Co pays 2.9%, how do you get to the 2.9% figure? I just can’t figure it out.
Thanks advance for your help.
Kind regards,
Andrea
It is a ‘missing’ figure to make the gains to both parties what is required.
Both parties will end up making a gain of 0.8% (before the bank fees).
If Greening did their own fixed interest borrowing they would pay 4.5%. So they must end up paying 4.5 – 0.8 = 3.7% (before bank fees).
Because they are swapping, they will actually borrow floating at E + 0.8%. They will receive E from Barrow, which means they are then paying 0.8%. So to end up paying 3.7% they need to pay 3.7 = 0.8 = 2.9% to Barrow.Alternatively, you could look at Barrow instead.
If Barrow did their own floating rate borrowing, they would pay E + 1.5%. So they must end up paying E + 1.5 – 0.8 = E + 0.7% (before bank fees).
Because they are swapping, they will actually borrow fixed at 3.6%. They will pay E to Greening, which means they are then paying E + 3.6%. To end up paying E + 0.7% they will need to receive 3.6 – 0.7 = 2.9% from Greening.Have you watched my free lecture on swaps?
Hi John,
Thanks so much for your detailed reply. I haven’t watched all your lectures yet. I will make sure to watch the one on swaps next.
Kind regards,
Andrea
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