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how do the the interest rate swap for this question???
Before attempting the question need to find out who can borrow cheaply..
so F VKeshi CO 5.5% L+0.4%
Counter party 4.6% L+0.3%
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0.9 0.1 so 0.8 to be shared 70% to Keshi Coso based on this its seems like CC can borrow fixed cheaply and Keshi at Libor
SO like yr lecture workings KESHI CC
Own borrowing 5.5% L+0.3%
savings -0.56 -0.24Can u answer this question it seems tricky to the one u did for Cocoa MOc
Without the swap, if borrowing fixed then Keshi would have paid 5.5%
There is a benefit by swapping of 0.8%, of which Keshi gets 70% which is 0.56% less charge of 0.10% = 0.46%Therefore Keshi must end up paying 5.5% – 0.46% = 5.04%.
But because of swapping, Keshi borrows floating and pays L + 0.4%
To make things ‘work’ the counterparty will pay L to Keshi. So now Keshi is paying L + 0.4% – L = 0.4%
Keshi has to end up paying a total of 5.04% (as above) of which 0.1% is charges – the remainder is 4.94%
So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%
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