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Hey John. Just a bit confused on interest swaps.
Lets say
A could borrow at fixed 10% and Libor + 1%
B could borrow at fixed 13% and Libor + 2%
As the potential benefit is 2% and we assume it is split equally,
I know if A requires variable and B requires fixed
A would get Libor and B would get 12%.BUT, my question is (This might be an extremely stupid question)
Can there be a swap where A requires fixed and B requires Libor so the benefit of 2% would lead to:
A getting 9% and B getting Libor +1.If a swap like above cannot be done, what is the reason for this?
No. The swap can only benefit one way round. On the figures you have given it can only benefit if A wants variable and B wants fixed.
The reason is that in this example, the difference in the fixed rates (3%) is greater than the difference in the floating rates (1%).
“A swap can only benefit one way round.”
Does this apply to swaps like above where ONE company have the advantage in both types of rate or does this apply to all kinds of swaps – like in a situation where both the companies have a comparative advantage in a type of loan?
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