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Hi Chris
Wondering if you can straighten my head out with this one. I’m not clear on the answer.
Company Fixed Floating
Co A 8% LIBOR+2%
Co B 10% LIBOR+5%options
1) Net savings if swap is worked out between the 2 companies is 1%
2) Net savings if swap is worked out between the 2 companies is 2%
3) A swap cannot be worked out because Co A has access to a fixed rate which is cheaper than that accessed by B
4) Net savings if swap is worked out between the 2 companies is 3%The correct answer given is 3 ….’a swap cannot be worked out………..’
Working through it, there is a net saving of 1% to be split (50/50 – not told otherwise). A has absolute advantage and a greater saving on the floating rate.
Working it through I end up with A Fixed 7.5% and B L+4.5%.
Again, not clear why answer states ‘swap cannot be worked out……….’
Cheers
IanAssuming that there is nothing else mentioned in the question other than what you have typed, then you are correct (and the answer given is wrong).
If A borrows fixed and B borrows floating then in total they are paying L + 13%.
If B borrows fixed and A borrows floating then in total they are paying L + 12%.
Therefore there is indeed a saving of 1% to be made (how they share it between them is up to whatever they agree between them, but there is a net saving in total of 1% 🙂 )
Thank you for your reply. Nothing else mentioned in the question that would lead to an alternative answer.
Thank you again!
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