- November 15, 2014 at 1:53 pm
kindly explain how the b part of this question is done i.e. estimate the potential annual inteest savings… i am kind of weak in the topic of swap. a detailed explaination of the answer would be highly appreciated.
Thanks in advanceNovember 15, 2014 at 3:58 pm
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.November 16, 2014 at 6:51 am
thank you somuch!! God Bless!!November 16, 2014 at 9:50 am
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)April 22, 2019 at 9:36 am
Sir, is currency swap calculation done the same way as interest rate swap?April 22, 2019 at 10:17 am
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).
The topic ‘Q70 Kaplan revision kit Dec 04 – Currency Swap’ is closed to new replies.