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sir
i had watched your lecture on interest rate swap.
then i attempted this question in your method.
i will type out my logic can you please verify if my thinking is right.
so for the question it is told that interest rate fluctuates ..it is not mentioned that they want fixed or floating..so i hadread your answerto another student that.. since interestrate fluctuates they wantfixed rate..so ontha t assumption i preparedthis answer..can you please verify the steps:keshi rozu total
own (5.5%) (l+0.3%) (l+5.8)(payableamounts before swap)
swap(l+.4) (4.6) (l+5)
——————–
0.8(gain) keshi-.56(70%_
rozu -.24(30%)
————————————————————————————————————————————
swap (4.6) (l+.4)k
pays
r (0.34) .34—————————————————————–
(4.94) (l+.06)k has to pay 4.94+.1=5.04%
so in this answer…the amount that k pays to r ..is itright ??
also is my answer presentation ok and right ?i have one more doubt regarding this q:
Borrowing at the floating rate and undertaking a swap effectively fixes the rate of interest at 5·04% for the loan, which is
significantly lower than the market fixed rate of 5·5%.
On the other hand, doing nothing and borrowing at the floating rate minimises the interest rate at 4·7%, against the next best
choice which is the swap at 5·04% if interest rates increase by 0·5%. And should interest rates decrease by 0·5%, then
doing nothing and borrowing at a floating rate of 3·7% minimises cost, compared to the next best choice which is the 95·50
option.
On the face of it, doing nothing and borrowing at a floating rate seems to be the better choice if interest rates increase or
decrease by a small amount, but if interest rates increase substantially then this choice will no longer result in the lowest cost.
The swap minimises the variability of the borrowing rates, while doing nothing and borrowing at a floating rate maximises the
variability. If Keshi Co wants to eliminate the risk of interest rate fluctuations completely, then it should borrow at the floating
rate and swap it into a fixed rate.this is the answer given in acca website. it states that we should take floating rate and swap it with fixed rate.in our answer we have assumed that they want fixedrate ..can you pls explain
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