Dear Sir,
I am looking at the Currency swaps article and found it slightly challenging. artical can be found on the following link https://www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/currency-swaps.html
I am struggling to understand how 2.9% was calculated?. Also, Barrow co can borrow in USA market at 3.6% and in Eur market at ERULIBR + 1.5% not sure how did the examiner arrive at this short cut in his answer.
many thanks in advance for your help.
Ask the Tutor ACCA AFM
Currency swaps Technical articles
7y ago#1The 2.9% is a balancing figure.
Had Greening done their own fixed interest borrowing then they would have paid 4.5%. There is a gain to be made by swapping 0.8% and therefore they must end up paying fixed interest of 4.5% - 0.8% = 3.7% (before the bank charge).
Given that they are swapping, they will actually borrow floating and be paying E + 0.8%. To end up paying 3.7% they settle up with the other party by receiving from the other party E. That means they are then paying E + 0.8% - E = 0.8%.
To end up paying 3.7% the will also pay to the other party 3.7% - 0.8% = 2.9%
I do suggest that you watch my free lectures on interest rate swaps.
Sign in to reply to this topic.