FIN 3410 Lecture Notes - Lecture 8: Interest Rate Swap, Futures Contract

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Day 8 Notes
Sample Exam 3
Background
Company X
Company Y
Difference
Fixed Rate
10.5%
12.0%
1.5%
Floating Rate
LIBOR
LIBOR + 1%
1%
CSx = CSy
B = 0.1%
X desires floating rate debt
Y desires fixed rate debt
Develop an interest rate swap
Problem
1. QSD =
a. Diff(fixed) Diff(floating) = 1.5% - 1% = 0.5%
2. CSx = ? CSy = ?
a. QSD = CSx + CSy + BG
b. 0.5% = CSx + CSy + 0.1%
c. 0.4% = CSx + CSy
d. CSx = CSy
i. CSx = 0.2%
ii. CSy = 0.2%
3. Comparative Advantages
a. X has CA in the fixed rate market
b. Y has CA in the floating rate market
4. Swap Rates
3) = swap rates
X
1) 10.5%
3) LIBOR
+ 10.7%
2) (LIBOR 0.2%) net borrowing rate
Y
1) (LIBOR + 1%)
3) + LIBOR
- 10.8%
2) (12% - 0.2%) net borrowing rate
** 12% = rate in the preferred market
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