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Currency swaps Technical articles

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Currency swaps Technical articles

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by John Moffat.
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  • April 7, 2019 at 6:18 pm #511404
    ajjajj
    Member
    • Topics: 18
    • Replies: 47
    • ☆☆

    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.

    April 8, 2019 at 12:34 pm #511446
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    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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