Exam 14: Interest Rate and Currency Swaps

Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are shown below: A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume both X and Y agree to the swap bank's terms. Fill in the values for A,B,C,D,E,& F on the diagram.

Swaps are said to offer market completeness

Company X wants to borrow $10,000,000 floating for 5 years.Company Y wants to borrow $10,000,000 fixed for 5 years.Their external borrowing opportunities are: Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values for A = Company X's external borrowing rate B = Company Y's payment to X (rate) C = Company X's payment to Y (rate) D = Company Y's external borrowing rate

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. In other words,what will you be willing to pay in euro against receiving USD LIBOR?

A major risk faced by a swap dealer is mismatch risk.This is

Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan.

Come up with a swap (exchange of interest and principal)for parties A and B who have the following borrowing opportunities. The current exchange rate is $1.60 = €1.00.Company "A" is in Milan,Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S.firm that wants to borrow €625,000 for 5 years at a fixed rate of interest.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.

Consider a plain vanilla interest rate swap.Firm A can borrow at 8% fixed or can borrow floating at LIBOR.Firm B is somewhat less creditworthy and can borrow at 10% fixed or can borrow floating at LIBOR + 1%.Eun wants to borrow floating and Resnick prefers to borrow fixed.Both corporations wish to borrow $10 million for 5 years.Which of the following swaps is mutually beneficial to each party and meets their financing needs?

Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided.

Explain how this opportunity affects which swap firm A will be willing to participate in.

Explain how this opportunity affects which swap firm A will be willing to participate in.

Nominal differences in currency swaps

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent in dollars and 6.60-6.80 percent in euro against six-month dollar LIBOR.This means

Come up with a swap (principal + interest)for two parties A and B who have the following borrowing opportunities. The current exchange rate is $1.60 = €1.00.Company "A" wishes to borrow $1,000,000 for 5 years and "B" wants to borrow €625,000 for 5 years.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.

Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4% pound sterling loan into a 2-year USD-denominated loan.

The size of the swap market is

Floating for floating currency swaps

Consider the borrowing rates for Parties A and B.A wants to finance a $100,000,000 project at a FIXED rate.B wants to finance a $100,000,000 project at a FLOATING rate.Both firms want the same maturity,in 5 years. Construct a mutually beneficial INTEREST ONLY swap that makes money for A,B,and the swap bank IN EQUAL MEASURE.

Explain how this opportunity affects which swap firm B will be willing to participate in.

Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a dollar swap quoted against flat USD LIBOR. In other words,what will you be willing to pay in euro against receiving USD LIBOR?