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Hello Mr John,
Thank you for the amazing lectures!
Question 2 of the above diet, the Interest rate swap question I need your clarification on the below:
1) How do I know what Lurgshall preferred, Floating or Fixed ? Does this statement validate what he needs- The bank has quoted it a nominal fixed rate of 4.6% for it to borrow?
2)I tried to solve it adopting your approach, I got 0.5 as the benefit but the examiner’s answer shows Int. rate differential which is 1.5% but while calculating % gain for Lurgshall 0.50 which is the differential between the fixed rate was deducted from 1% which is the differential between the floating rate.
Or we are just looking out for the best of both rate? It has an advantage to borrow at both rate but floating is larger, meaning the difference from fixed rate becomes a disadvantage to be deducted?.
If my observations are correct, what is now the difference between your approach and the examiner (a bit confused)
Please explain why?
I will appreciate your response.
Thank you.
Hello Mr John,
Point 2 is clear now, you mentioned in the video the difference at both rate level. I missed out the bank fees.
But waiting for your response to my point 1.
Thank you,
The clue is that LIBOR is expected to rise.
However, appreciate that a swap can only be beneficial one way round. If you get a question with a swap and if it is not clear whether they want fixed or floating (which it hopefully will be) then I am afraid that you have to quickly try both ways and see which way is cheaper in total (it doesn’t take many seconds).
Thank you sir!
It is much clearer now.
Also, I noticed your recommendation, Swap is meant to give an advantage if it does not then it should not be done and we state that, hope I’m correct.
Thanks again.
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