2 Companies A and B face the following interest rates: Company A 3% Company B x% UK pounds (fixed rate) US dollars (floating rate) LIBOR-0.25% LIBOR-0.5% (i) Assuming that A wants to borrow in British pounds at a fixed rate and B wants to borrow in US dollars at a floating rate, derive a lower or upper bound for x that allows these companies to enter into a profitable swap agreement. (ii) Assume now that x = 2.5%, design a swap that is equally at- tractive to both companies arranged by a financial intermediary that makes a profit of 0.05% from these operations. (iii) Assume now that x = 2.8%, describe the conditions under which a swap contract between A and B makes sense. Design a swap that is equally attractive to both companies without a financial intermediary.

2 Companies A and B face the following interest rates: Company A 3% Company B x% UK pounds (fixed rate) US dollars (floating rate) LIBOR-0.25% LIBOR-0.5% (i) Assuming that A wants to borrow in British pounds at a fixed rate and B wants to borrow in US dollars at a floating rate, derive a lower or upper bound for x that allows these companies to enter into a profitable swap agreement. (ii) Assume now that x = 2.5%, design a swap that is equally at- tractive to both companies arranged by a financial intermediary that makes a profit of 0.05% from these operations. (iii) Assume now that x = 2.8%, describe the conditions under which a swap contract between A and B makes sense. Design a swap that is equally attractive to both companies without a financial intermediary.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Bhuptbhai
Hedging using Swap You want to borrow in U.S. dollars at a fixed rate of interest to match with your investment cash flows. Bank A offers you to borrow in US dollars at 7% or in Australian dollars at LIBOR + 0.5% per annum (adjusted for the differential impact of taxes). You found that Bank A also offer another customer who requires a floating-rate loan to borrow in US dollars at 7.5% or in Australian dollars at LIBOR + 2.0% per annum. Bank A can arrange a swap between you and the other customer with a net 20-basis-point spread. Design a swap that minimizes your borrowing costs and appears equally attractive to you and the other customer. What rates of interest will you and that customer end up paying? (Provide explanation, list your calculation process and use figure to illustrate the swap structure).
Company A and B has been offered the following rates per annum on a £10 million 5 - year loan. Company Fixed (%) Floating (%) A 5 LIBOR + 1.2 B 6 LIBOR + 0.3 Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design a swap that will give a bank, acting as an intermediary 0.5% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text. (15 Marks) (Please answer without use of excel)
2. Money Market Hedge on Receivables Assume that Parker Company will receive 200,000 Canadian dollars in 360 days. Assume the following interest rates: 360-day borrowing rate 360-day deposit rate U.S. 6% 4% Canada 5% 3% Assume the forward rate of the Canadian dollar is $.80 and the spot rate of the Canadian dollar is $.78. If Parker Company uses a money market hedge, how much U.S. dollars will it receive in 360 days from its Canadian dollar receivable? (round to whole dollars) (2 points)
Company A wants to borrow US Dollar (USD) at a floating rate of interest and Company B want to borrow Australian Dollar (AUD) at a fixed rate of interest. They have been quoted the following rates by Bank C. USD AUD Company A LIBOR +0.5% 5.0% Company B LIBOR+1.0% 6.5% Develop an interest rate swap that will net the bank 50 basis point spread and will appear equally attractive to Company A and Company B. Explain your answer.
FÐI may involve mergers with and acquisitions of existing foreign businesses. Select one: O True O False From the perspective of the writer of a put option written on C52,500. it the strike price is $1.25/e, and the option premium is $2,625, at what exchange rate do you start to lose money? Select one: O a $1.2/c O b $1.20/€ O c. S1.30/€ O d $1.52/e
klp.3
fINANCE
Company A (a U.S. MNC) wants to borrow £10,000,000 at a fixed rate for five year. Company B (a U.K. MNC) wants to borrow $16,000,000 at a fixed rate for five year. Today's exchange rate is £1- $1.6. The information below summarizes what each company can do without using swaps. Company A Company B $ Loans 8 10.6 £ Loans 11.6 12.4 If Company A wants to save 0.3% of the £10,000,000 loan through a Swap Bank, and If Company B wants to save 0.2% of the $16,000,000 loan through a Swap Bank. How much can the Swap bank earn on pound (£) loans (in terms of %) after meeting Company A and Company B's demand? (if your answer is 1.34%, just enter "1.34". If your answer is -1.34%, just enter"-1.34").
HSBC recently arranged a three year swap between Oman Oil and Aramco. Oman oil needs US dollar floating rate funds, and Aramco needs US dollar fixed rate funds. The rates at which they can get the required funds in their respective markets are shown in the following table Floating Rate Funds Fixed Rate Funds. Oman Oil LIBOR+ 4% 11% Aramco LIBOR+ 1% 10% ARRANGE A SWAP (you can eitherexplain or drawa diagram)
Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 3% 5% 90-day forward rate of Malaysian ringgit Spot rate of Malaysian ringgit $0.394 $0.398 Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar. The firm will pay out $ in 90 days if it uses the forward hedge and $ if it uses the money market hedge. Thus, it should use the -Select- hedge.
2 Assume Carlton enters into a three-year fixed-for-fixed swap agreement to receive Swiss Franc and pay U.S. dollar annually, on a notional amount of $6,000,000. The spot exchange rate at the time of the swap is SFO.8/$. Assume that one year into the swap agreement Carlton decides it wishes to unwind the swap agreement and settle it in dollars. Assuming that a two- year fixed rate of interest on the Swiss Franc is now 2.59%, and a two-year fixed rate of interest on the dollar is now 5.90%, and the spot rate of exchange is now SFO.0.810/$. To Carlton, what is the net present value (in dollar) of the swap agreement? (Keep the sign and two decimal places.) 3 Euro-€ Years Bid Ask Bid Ask Swiss franc 3.08 3.12 1.68 1.76 3.25 3.29 2.12 2.17 U.S. dollar Bid Ask 5.43 5.46 Japanese yen Bid 0.45 5.54 5.59 0.56 Ask 0.49 0.59

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS