Question

# Consider counterparties AA and BB. AA desires n-year floating rate on US dollars while BB desires...

1. Consider counterparties AA and BB. AA desires n-year floating rate on US dollars while BB desires fixed rate on pound sterling. The following borrowing costs are available to the parties:

Floating rate (\$)                    Fixed rate (£)

AA                               7.75%                                    12.75%

BB                               8.10%                                    13.55%

A swap dealer proposes BP-USD currency swap under which the dealer stands to pay a fixed rate of 13.20% (on BP) against a floating rate of 8% (on USD) or receive a 13.30% fixed against floating rate of 8%.

Obtain the savings and effective costs to each party and the dealers pay-receive spread from swapping.

AA

 Borrow at Fixed Rate -12.75% Pay floting rate on swap -8% Receive fixed rate on swap 13.20% Effective Rate -7.55%

AA can borrow at an effective floating rate of 7.55% vs rate of 7.75% if he would have borrowed directly

Saving = 0.20%

BB

 Borrow at floting Rate -8.10% Pay floting rate on swap -13.30% Receive fixed rate on swap 8.00% Effective Rate -13.40%

BB can borrow at an effective Fixed rate of 13.40% vs rate of 13.55% if he would have borrowed directly

Saving = 0.15%

Same is shown in swap diagram below

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