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Interest Swap

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Interest Swap

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 21, 2018 at 7:57 pm #453195
    adolf121
    Member
    • Topics: 19
    • Replies: 39
    • ☆☆

    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?

    May 22, 2018 at 9:31 am #453312
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54682
    • ☆☆☆☆☆

    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%).

    May 22, 2018 at 2:36 pm #453372
    adolf121
    Member
    • Topics: 19
    • Replies: 39
    • ☆☆

    “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?

    May 22, 2018 at 3:59 pm #453415
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54682
    • ☆☆☆☆☆

    It applies to all swaps. Think about it – there can only ever be a benefit one way round.

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Interest Swap’ is closed to new replies.

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