Sir in swapping for eg ABC Co. has a fixed rate of 5.9% and floating rate of LIBOR+0.5 while Counter party has a fixed rate of 6.4% and floating rate of LIBOR+1.5.
When we calculate the interest rate differential than we will get a difference of 0.5% (5.9%-6.4%) on fixed rate and a difference of 1% (LIBOR + 0.5-LIBOR + 1.5) on floating rate.
So my question is that which party has comparative advantage on which rate and which party will borrow at which rate and also what will be the benefit.
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Swapping
7y ago#1ABC will borrow floating, the counterparty will borrow fixed.
They will swap and the end result will be that ABC will end up paying fixed and the counterpart will end up paying floating.
The overall saving will be 0.5% and unless the question says that they agree differently, they will share it equally so 0.25% each.
Have you watched my free lecture on swaps?
Not yet but earlier I took a lecture on swapping from a teacher in my city and we practised 3 to 4 questions on swapping but I found a question in the kit which was a little bit different than those that I have practised with my teacher, I was confused on the benefit part on that particular question.
The questions that I practised were giving high interest rate difference in fixed rate and a low interest rate difference in floating rate but this question was opposite at the benefit part.
7y ago#3I hope it now makes sense (but do watch the free lectures :-) )
Yes and thank you sir, was just confuse on the benefit part and will watch your lectures.
7y ago#5You are welcome :-)
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