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Hello sir,
When calculating the net benefit from the swap, suppose the total benefit to both parties is 4% (3% from fixed and 1% from variable) from the swap (before considering bank fees). Now, some past papers go like ” The bank will charge bank fees of 0.25% for arranging the swap ” Does this include the fees charged from the counterparty as well?
Sometimes the question is clear by saying, ” fees of 0.25% from both parties” but in statements like the one I mentioned above, what should I interpret?The solution deducts 0.25% from 4% which means 0.25% is the TOTAL fees charged from both parties so should always assume 0.25% is the total fee charged from both parties??
You will have to give the name (and date) of a past question that is confusing you with regard to this.
I have all past exam questions and I cannot recall one where it has not been clear from the question with regard to the bank charges.
Oh dear – I know that I said that I had all past exam questions, but I only keep them for 15 years and so I do not have the 2004 exam 🙁
The examiner has changed twice since 2004 and so the style of questions has changed.
The scenario goes as follows – ” The bank would charge a fee of 0.75% per year (in
sterling) for arranging the swap. Galeplus would take 75% of any net arbitrage
benefit from the swap, after deducting bank fees.”In the solution they have deducted 0.75% from total benefit from the swap and then apportioned 75% of the remaining benefit to Galeplus ( which means they have considered 0.75% as the “TOTAL” fee charged from both parties.
However if I read the scenario above, it isn’t clear that 0.75% is the total fee charged from both parties. Am I right or have I made some error in interpreting it?
ThanksUnless a question specifies how much is charged to each party (or specifies how they decide to share the charge) then you should assume that is the total charge. There is only one intermediary, and it would be up to the two parties to decide how to split it between them.
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