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IF I do the swaps in yr method then IM not getting the answer, here the benefit to keshi 0.7*0.8 but the end result u cant get it? why is that how to do this question.?
I don’t know why you can’t get the end result.
K wants to borrow fixed. If they did borrow fixed then they would pay 5.5% (and if the counterparty were floating then they would pay L + 0.3%). So in total it would be L + 5.8%.
If they do a swap, the total will be L + 0.4% + 4.6% = L + 5%
Therefore there is a total saving to be made by swapping of 0.8% of which K gets 70%, which his 0.56%.
Therefore they will save 0.56% on what they would be paying if they did not do the swap.
So they will end up paying 5.5% – 0.56% = 4.94%
In addition they have to pay the banks charge of 0.1%
4.94% + 0.1% = 5.04%Yeah I can understand the way u have done, but I was luking at the way u did CMC and I got confused and Im still confused… In yr recorded videos there re two lectures based on SWAP. IM getting confused.. 🙁
For example Keshi we take floating rate L+0.4%- savings of 0.56, then if u do the way u did for CMC, I got wrong and confused….
I do it the same way throughout.
Keshi wants to borrow fixed.
Instead they are going to borrow floating and enter into the swap.
The whole purpose is to end up borrowing fixed, but paying less than they would if they simply borrowed fixed themselves in the first place.
Hi,
how we know that Keshi wants to borrow fixed? and not variable? what is reasoning behind? Thank you.
@johnmoffat said:
I do it the same way throughout.Keshi wants to borrow fixed.
Instead they are going to borrow floating and enter into the swap.
The whole purpose is to end up borrowing fixed, but paying less than they would if they simply borrowed fixed themselves in the first place.
You need to check both alternatives – it is borrowing floating and then swapping so as to end up fixed is the option that gives an overall saving.
I watched one of your lectures where you have the company on the left hand side and the counter party on the right. I’m able to understand how they get to the outcome of 4.94% for Keshi but am getting confused on how if we use the method you show us in the lecture, what would you see on the right hand side column for the bank counter party. What would they end up paying in total?
Would the counter party owe Libor + 0.06 before fees? Sorry if silly question. Was trying to apply your general method when you show how to calculate currency swaps to this question and got lost on what is paid by the counter party like what would they owe Keshi and what would be their net payment. The answer doesn’t really tell you but would help me see how i can apply your methodology in the lecture to this exam question.
Thank you!
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