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Please help me to confirm whether my calculation as bellow is correct or not :
Own borrowing :
Lurgshall (L) : BR + 0.5%, counter party (C) : 6.1%. Total BR + 6.6%Swap:
L : 5.6%, C :BR + 1.5%. Total : BR + 7.1%Saving : 0.5%, divided to 2 party ( before bank charge ) 0.25
Bank charge : 0.1 for each party
Net benefit after bank charge for each party : 0.15
Swap mechanism:
L: BR + 1.5%, C: 5.6%
End result :
L: BR + 0.5% -0.25 %= BR + 0.25
C : 6.1%-0.25% = 5.85%C pay L 0.25%
Thank you.
The first half of what you have typed is correct in that the net benefit is 0.15% to each party.
However the end result must therefore be what they would have paid without the swap less the 0.15% saving.
So L must end up paying 5.60% – 0.15% = 5.45%, and C must end up paying LIBOR + 1.5% – 0.15% = LIBOR + 1.35%.
There are several ways they could achieve this end result, but the standard way is as in the examiners answer in that C pays LIBOR to L, and L pays the balancing figure to C (which in this case is 4.85%).
I confuse with this question.
So far I apply your method in the lecture to deal with all question on swap and it has the result the same with examiner.
But in this question, it did not the same.
You said that a half of my answer is correct.
Could you please show me how to solve the remaining part of the answer using the method as your lecture ?
Why in your lecture and other question, the calculation of end result does not take into account of bank charge but in this question, it must to take into account of bank charge?
We always take account of bank charges!! The reason I don’t in my lecture example is because there is no mention of any bank charges.
The answer to this question is exactly the same in principle as my lecture example.
L wants to borrow fixed. If they didn’t swap then borrowing fixed would mean that they would pay 5.6%.
Instead they will borrow floating (and then swap with C), and because there is the saving to be made of 0.15% then the end result must be that they end up paying 5.6% – 0.15% = 5.45%.
Swapping means that they will borrow floating and be paying BR + 0.5%. They will receive BR from C, so now they are paying 0.5% plus bank charges of 0.1% so a total of 0.6%.
They must end up paying 5.45% as explained above, and so to make this happen they will have to pay the difference of 4.85% to C.Hello Mr. John,
I want to ask you that…How come we got to know that Lurgshall co. Wants to borrow at fixed rate and swap with variable rate?
At the moment the treasurer is planning to borrow at a variable rate. This will incur risk (because LIBOR is expected to rise) and so they are considering hedging this risk and considering using a forward rate, using options (both of which would remove or limit the risk) or by using a swap. They way that a swap would remove the risk is by replacing paying a floating rate with paying a fixed rate instead.
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