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my question is on interest rate swap part. I have done few of interest rate swap question with your first method on lecture video(the simpler one). I found it easy to use your method and can do the previous question at ease bcs it was mentioned what the rate the company currently having (floating/fixed)
1.But for this question, it was not mentioned which rate it want/have. So, how do i determined if the question is ambiguous?
2. and if i were to apply your method, can you show me how the working will be for :
i. own borrowing
ii. swap
iii. end result
(this is the method i use to avoid confusion, as shown in your lecture)Really appreciate your guidance. Kindly help me pls 🙂
3. or, IS IT for every interest rate risk swap, Co. ALWAYS have float interest rate?
See my previous answers:
https://opentuition.com/topic/keshi-co-1214-part-a-swap/The don’t have to always have floating interest rates.
However here, the question does say that there is increasing uncertainty in the markets. To reduce the risk they will swap floating rate borrowing for fixed rate borrowing.Ok i have read your post on the link, so to conclude based on your method,
i. own borrowing (without swap):
K: 5.5%
C: L+0.3%
total : L +5.8%ii. swap
K : L+0.4%
C:4.6%
total : L+5%saving = 0.8%. K save 0.56%(70%*0.8%)
iii.end result
K: 5.5%-0.56%+0.1% = 5.04%
C: L+0.3% – 0.24% +0.1% =L+0.16%Is my computation here correct?
1.If yes, if i only apply this method to make comparison and explanation, would it be okay? Because it is confusing for me to get the ‘4.54%’ eventhough you have explained it on the post in the link given.It still confusing for me, i’m sorry.
“So, to make things ‘work’ completely, Keshi must pay the counterparty 4.94% – 0.4% = 4.54%”
2.and, if for example there is no mentioned such as increasing uncertainty in the market, how were we able to decide which they initially want to borrow? (or there will always give a hint in the question?)
3. interest rate swap is only apply on borrowing only right?
p/s; for the question 1. (it just bcs i’m afraid if there would be a question that required the computation as shown for 4.54%)
Your calculation is correct.
1. Remember that K is actually borrowing floating and then swapping (so end up effectively paying fixed. So initially K will be borrowing at L + 0.4%
Also, we have calculated that the end result is that K will end up paying fixed interest of 4.94% plus bank changes.
To achieve the end result, K will borrow at L + 0.4%. They will receive L from the counter party (so they are now ending up paying L + 0.4% – L = 0.4%). How do they end up paying 4.94% (before bank charges)? Well since so far we have them paying 0.4% they need to pay the difference of 4.94 – 0.40 = 4.54%.
It is unlikely that an exam question will ask for the ‘settling’ up part of it, and even if it does then just showing the end result (without the settling up) will be getting more than the 50% of the marks needed 🙂
Ahh thank you! i got what you meant. But which rate were you referring for this sentence? :
” even if it does then just showing the end result (without the settling up)”
4.94% or 5.04% ?
Other than that, i really got what you explained. 🙂
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