Q70 Kaplan revision kit Dec 04 – Currency Swap

I do not have a Kaplan Kit, but I assume that you mean the question ‘Galeplus’?

If Galeplus were to borrow floating then they would have to pay P + 2%. If counterparty were to borrow fixed, then they would pay 8.3%
So in total they would be paying P + 2% + 8.3% = P + 10.3%

On the other hand, if Galeplus were to borrow fixed they would pay 6.25% and if the counterparty were to borrow floating they would pay P + 1.5%.
So in total they would be paying 6.25% + P + 1.5% = P + 7.75%

So if they were to borrow in the opposite currencies (and then swap – i.e. pay each other’s interest) then they could save (P + 10.3%) – (P + 7.75%) = 2.55%

(The reason for the saving is that Galeplus can borrow cheaper in the UK and the counterparty can borrow cheaper in Persia).

There is a banks fee of 0.75%, but this still leaves a saving of 2.55 – 0.75 = 1.80% which they can share between them as per the arrangement in the question.

You are welcome 🙂

(In future, if you want me to answer then please ask in the P4 Ask the Tutor Forum. This forum is for students to help each other)

Yes – apart from the fact that obviously currencies need exchanging (but exam questions always state the ‘rules’ that have been agreed between the parties for this).