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Hello Sir,
1. Regarding part a please explain the meaning of this statement which is one of the advantage of swap:
‘Termination costs for an existing loan may make it prohibitively expensive to change finance. A
bank’s service fee to arrange a swap may be lower than the termination charge. Also, if a company
has long term borrowings in one currency but needs to switch to paying interest in another currency
for a shorter period, a swap can enable this without having to terminate the original loan.”
2.Regarding part b (ii) I do not understand how the figure 39.13 calculated ausing the split method that is 2000/85.4 + 2040/129.88 = 39.13.I mean , i do understand the calculation but do not get that why 2000 out of 4,040 is converted using current spot rate and the remaining 2,040 is converted using year 3 exchange rateBest Regards
1. Suppose I am currently borrowing in $’s, but I would prefer to be borrowing in Euros.
What I could do is simply take out a new loan in Euros and repay the $ loan. However, repaying the $ loan early could mean paying penalties (termination costs).
If instead we organised a swap, we would not have those penalties.2. In the question there is a table of the borrowing rates. If you read the sentence 3 above from the table, it says that “both swaps at today’s spot rate”. So the principle part is at todays spot and the rest of it has to be at the year 3 rate.
sir i have a confusion regarding this question that:
how do we know that what is current exposure of galeplus before swap and what is their exposure after swap???
means whether galeplus is currently paying fixed or floating interest rate and whether it wants to achieve fixed or floating interest rate exposure after swap??
this thing is not mentioned anywhere in question!!!kindly help me!!!
Because the question asks you to estimate the interest saving that might be made, you have to check which was round would give a saving (i.e. borrowing fixed, or borrowing floating).
The same sort of problem occurred in one part of Q1 in June 2014 (even though there it was purely an interest rate swap, not a currency swap) and you can see in my free lecture on that question as to how it is dealt with.
Hi John,
In Galeplus, the difference of swap 2.05 and. 0.5 has been added and the bank fee has been deducted from that which is okay. But in comparison with arnbrook plc, the difference 1% and 0.50% has been subtracted ( not added like in Galeplus). What’s the difference?In Arnbrook 0.5% is a saving and is therefore subtracted to get the net interest cost.
In Galeplus, the total saving is 2.55% and again is subtracted to get the effective net interest cost.
These are both very old questions set by different examiners, which is why the layout of the two is different.
I assume that you have watched my lecture on swaps?
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