Question

Two firms each need $10 million in funds and go to the market for quotes. They...

Two firms each need $10 million in funds and go to the market for quotes. They are         

quoted: for A – fixed: 7 per cent; floating: BBSW plus 2 per cent; for B – fixed: 8 per cent; floating: BBSW plus 2.4 per cent. If A accepts the fixed-rate funds and B the floating-rate funds, then they both decide they can reduce their cost of funds through a swap, can you structure a swap where they both benefit equally?

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Homework Answers

Answer #1

A accepts Fixed Rate i.e. 7%

B accepts Floating Rate i.e. BBSW + 2.4%

Total Interest paid by both A and B is 7% + BBSW + 2.4% = 9.4% + BBSW

Total Interest if they choose otherwise will be

Interest for A = 8%

Interest for B = BBSW + 2%

Total Interest will be 8% + BBSW + 2% = 10% + BBSW

Total Savings by swaping will be = (10% + BBSW) - ( 9.4% + BBSW )

= 0.6%

0.3% of the Fund can be gained by both the firms.

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