Company Coinbase is looking to expand its business and considering to borrow fromthe market. Coinbase has been offered the rates per annum on a $500 million 5-yearloan by its bank: (SOFR: Secured Overnight Financing Rate) shown below. With thequotes from its bank, the floating rate is cheaper given the SOFR is 3% at present.However, the board of Coinbase fears that the interest rate will continue rising andthink it is too risky to have variable liability in a medium time horizon. They wish toborrow with a fixed liability. Company Biance on the other hand, is to seekopportunities by having floating exposure. The offered rates per annum on a $500million 5-year loan for Biance are also shown below. Design a swap contract that canfacilitate the objectives of Coinbase and Biance. The swap contract should be equallybeneficial to both companies.CompanyBianceCompanyCoinbaseFixed Rate5.00%7.00%Floating RateSOFR+1.50%SOFR+2.00%

A swap agreement is a derivative contract that allows 2 parties to exchange their obligations such…

million 5-year loan for Biance are also shown below. Design a swap contract that can facilitate the objectives of Coinbase and Biance. The swap contract should be equally beneficial to both companies.

million 5-year loan for Biance are also shown below. Design a swap contract that can facilitate the objectives of Coinbase and Biance. The swap contract should be equally beneficial to both companies.

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

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Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

Question

Company Coinbase is looking to expand its business and considering to borrow from
the market. Coinbase has been offered the rates per annum on a $500 million 5-year
loan by its bank: (SOFR: Secured Overnight Financing Rate) shown below. With the
quotes from its bank, the floating rate is cheaper given the SOFR is 3% at present.
However, the board of Coinbase fears that the interest rate will continue rising and
think it is too risky to have variable liability in a medium time horizon. They wish to
borrow with a fixed liability. Company Biance on the other hand, is to seek
opportunities by having floating exposure. The offered rates per annum on a $500
million 5-year loan for Biance are also shown below. Design a swap contract that can
facilitate the objectives of Coinbase and Biance. The swap contract should be equally
beneficial to both companies.
Company
Biance
Company
Coinbase
Fixed Rate
5.00%
7.00%
Floating Rate
SOFR+1.50%
SOFR+2.00%

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