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Dear friends,
Could you please tell me which rate (fixed or floating) should i choose in the calculation swap arrangement ? I have no problem with calculation of advantage for the company and counterparts but have no idea which rate we would like to use to receive swap.
In almost every video or lecture tutor says that this information should be given in the question, but it is not usually so.Thanks in advance!
Almost all past exam questions do make it clear as to whether the company wants to be paying floating or fixed in the wording.
If it doesn’t then you choose whichever way ends up making a saving (and only one way will).Hi John, please can you help with my question. I am reviewing ACCA specimen exam-September 2018. In question 1 we are told about a swap, it looks to me like CMC has comparative advantage in both fixed and floating( yield+0.4 and 2.2 vs yield +0.8 and 3.8%) Also in the solution I found it weird that the total benefit was 1.2% (1.6-0.4) so I’m just wondering why it’s treated this way. I already added 1.6+0.4 =2. Also it doesn’t state that CMC will prefer fixed so is the solution making an assumption.
I will really appreciate your response.
Thank you!!
The question asks you to demonstrate how they could benefit, and a swap will only give a benefit one way round.
Here, if CMC borrowed fixed and the other party borrowed floating, then the total interest would be 2.2% + L+0.8% = L + 3%
If CMC borrowed floating and the other party borrowed fixed then the total interest would be L+0.4% + 3.8% = L + 4.2%
Therefore there is a total saving to be made of 1.2% (before the bank fees) if CMC borrows fixed and the other party borrows floating, and then they swap (so CMC end up paying floating and the counterparty ends up paying fixed).
Have you watched my free lecture on swaps?
(Also, you can find a lecture working through the whole of this question linked from the following page:
https://opentuition.com/acca/afm/afm-revision-lectures/
It was set in the June 2014 exam)
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