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Quarterly Swap Payments for ABC Limited

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A manufacturing company, ABC Limited, which makes motor components, has taken a floating-rate loan from its bank and wishes to swap this liability for a fixed-interest rate exposure. Through an intermediary, the company enters into a one-year quarterly-pay £ 2,000,000 fixed-for-floating swap as the fixed-rate payer with counterparty, TrustInvest Corp., a pension fund. The agreed fixed rate is 6%, and the floating rate is 90-day LIBOR+1%, with both rates based on a 360-day year. Supposing the following LIBOR data becomes available:

Annualised LIBOR:

Current 5%
In 1 Quarter 5.5%
In 2 Quarter 5.4%
In 3 Quarter 5.8%
In 4 Quarter 6.0%


a) Discuss the reasons why a variable for fixed interest rate swap may be desirable, in general, for a company such as ABC Limited.

b) Show your calculations of the quarterly swap payments due from ABC Limited for the duration of the swap agreement and comment on alternative hedging possibilities which open to the company.

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Quarterly swap payments for ABC Limited are examined.

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