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Hi sir,
There are few question that I want to ask you regarding Question 2 Keshi Co.
1) I’ve found out that the amount calculated out using the tick size formula(Contract size x 0.01% x 3/12) is different from the amount shown in the answer provided by ACCA. Will it affect the marking if I use the tick size formula, as the net payment will be totally different?
2) The method of calculating the swap, is it suitable if I use the method that you’ve taught in June 2014 sitting? Meanwhile for the 70% benefit, what does that mean? I’ve read through the answer many time and I still don’t get it. 🙁
Thank you. 🙂
1. I don’t know what you mean by the ‘tick size formula’. There is no formula!
You can either use ticks or you can do it without ticks – the answer will be exactly the same.
I assume from what you write that you have watched my lectures on risk management. I never bother using ticks – I find it easier without – but I do explain ticks.2. With regard to the swap, then yes – the way I approach it will get full marks.
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%
Thank you sir! 😀
By the way, any main topic that has been wipe out or added in P4 syllabus? I’ve gone through the study guide from ACCA and only found out that EVA has been taken out from the syllabus.Well that should not be a big problem then.
I just read through the examiner article on currency swap, is it same as interest rate swap?
I’ve try the method that you’ve taught, and I had found out that why the examiner did not use the “after” swap to calculate out the net cost, instead of using the “before” swap?Hi John,
would you please kindly advise how the benefit of 0.8% came from? I feel lost while doing SWAP….
Thanks a lot!
kimmi:
Currency swaps have only very rarely been mentioned in the exam, and when they have been they have effectively been an interest rate swap. The only extra bit has been converted the repayment of the principal into the other currency, but the rate for the conversion was given (it was agreed when the initial swap took place).
If keshi borrows floating and the counterparty borrow fixed, then the total interest is (L + 0.4) + 4.6 = L + 5%
If keshi borrows fixed and counterparty borrows floating, then the total interest = 5.5 + (L + 0.3) = L + 5.8%
The difference between the two totals is 0.8% so this is the saving that can be made if they swap the right way round.
(Have you watched my free lecture on swaps?)
many thanks for your explanation and well obtained the methodology here. i will go through the lecture on swaps then.
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