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John Moffat.
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humai
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Sir in both of these questions while calculating forward rates in 1 Qs they have deducted bank fee from the forward rate, whereas, in other Qs they have not deducted bank fee from the forward rate. Why is that so?
John Moffat
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Both these questions are questions on swaps (forward rates are only being used as part of the swap calculations) and bank charges are always going to be payable when there is a swap.
You do not state which other questions you are referring to, but I would guess that they were testing on using forward rates directly (rather than on swaps) in which case bank charges are not relevant.
humai
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Sir, D16 Q4 a and J12 Q3 b both are tested on swap and both Qs have same requirement, i.e calculate the amounts Sembilan Co / Pault Co expects to pay or receive every year on the swap (excluding the fee of 20 basis points).
But in case of Pault Co while calculating forwards rates based on spot yield curve rates, examiner has deducted 20 basis points from forwards rates while calculating receipts. eg you can see that in Year 2 forward rate calculated was 4.8%, but then then he deducted 20 basis points from it while calculating reciept for Year 2, and therefore used 4.6%
On the other hand, in Sembilan Co Qs, he did not do this. E.g in year 2 forward rate was 3.7% and he directly used this 3.7% for calculating receipt. He did not deduct 20 basis points this time. Why is that so?
John Moffat
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In Pault the question says that they will receive an amount of the spot yield curve rate minus 20 basis points (this is not bank charges, but is just the amount that has been agreed). So in the answer 0.20 has been subtracted.
In Sembilan the question says that they will receive an amount based on the current yield rate. There is no mention of any basis points reduction, so the answer does not take any reduction.
(In both cases there is an annual charge for the swap (25 basis points in Pault, and 20 basis points in Sembilan) and these have been taken into account in the calculation of the swap.)
humai
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