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Sir,
1)In swap, why do we assume that keshi want to pay fix? I know that in swapping situation keshi needs to borrow Libor and swap to fix and hence end up paying fix. But what if keshi wants to pay variable? Its like if using swap, only option to go for is fixed. Certainly keshi may want to borrow variable.
2) basis was 44 difference initially. I have used 0.0044 as starting point because this is 44bp. But this was wrong. Is this because when we calculate basis point using tabular format, it is multiplied by 100? Like how future or libor is shown? It is in percentage form.
1 We don’t know whether they want to borrow fixed or variable, that is up to you to advise. As the examiners answer states if interest rates are only going to change by a small amount then floating would probably be the better choice. However if they want to eliminate the risk completely they should borrow floating and swap it into a fixed rate.
2. 1 basis point is 0.01%. So 44 basis point is 0.44%
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