Explore BrainMass

Explore BrainMass

    Swap Market and Currency Problem

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    1. At present, LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward rate for a LIBOR3 deposit to be placed in three months?

    2. Company A, a low-rated firm, desires a fixed-rate, long-term loan. A currently has access to floating interest rate funds at a margin of 1.5% over LIBOR. Its direct borrowing cost is 13% in the fixed-rate bond market. In contrast, company B, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 11% and floating-rate funds at LIBOR + ½ %.

    a. How can A and B use a swap to advantage?

    b. Suppose they split the cost savings. How much would A pay for its fixed-rate funds? How much would B pay for its floating-rate funds?

    3. Nestle rolls over a $25 million loan priced at LIBOR3 on a three-month basis. The company feels that interest rates are rising and that rates will be higher at the next roll-over date in three months. Suppose the current LIBROR3 is 5.4375%.

    a. Explain how Nestle can use an FRA at 6% from Credit Suisse to reduce its interest rate risk on this loan.

    b. In three months, interest rates have risen to 6.25%. how much will Nestle receive/pay on its FRA? What will be Nestle's hedged interest expense for the upcoming three-month period?

    4. Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yet at 4.5% or floating rate dollars at LIBOR +0.25%. KDB can borrow fixed-rate yen at 4.9% or floating -rate dollars at LIBOR +0.8%.

    a. What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB?

    b. Assuming a notional principal equivalent to $125 million, and a current exchange rate of 105 yen/dollar, what do these possible cost savings translate into in yen terms?

    c. Redo parts a and b assuming that the parties use Bank of America, which charges a fee of 8 basis points to arrange the swap.

    5. Explain how Cisco Systems can use arbitrage to create a forward to fix the interest rate on a three month $10 million loan to be taken out in nine months. The loan will be priced off LIBOR.

    © BrainMass Inc. brainmass.com December 15, 2020, 2:44 pm ad1c9bdddf


    Solution Summary

    This posting provides detailed solutions to the student's swap market and currency problems.