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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.
The 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.
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