Question

Consider this scenario: An American company would like to barrow fixed-rate yen. They can barrow fixed-rate yen at 5.4% or floating-rate dollars at LIBOR + 1.24%. There is also an Asian company who would like to borrow floating-rate dollars. They can borrow fixed-rate yen at 5.8% or floating-rate dollars at LIBOR + 1.7%. What is the total cost savings which can be realized through an interest rate/currency swap between the two?

Answer #1

In a swap, both companies will borrow at the opposite rate of what they desire. So, American company will borrow @LIBOR + 1.24% and Asian company will borrow @5.8%. They will then, enter a swap agreement, where American company will take the fixed rate of the Asian company and Asian company will take the floating rate of the American company.

Now, American company could borrow locally @5.4% but in the swap, they are getting a rate @5.8%. So, it is at a loss of 0.40%. This loss will be compensated from the mutual swap cost savings or gain.

The Asian company could borrow locally @ LIBOR + 1.7% whereas in the swap, it is getting a rate @ LIBOR + 1.24%. So, their is a gain of 0.46%.

Net cost savings = 0.46% - 0.40% = **0.06%**

This gain will be shared equally among the two.

1. Suppose Google would like to borrow fixed-rate yen and can
borrow them at 4.00% or floating-rate dollars at LIBOR + 0.10%. The
Panasonic Corporation would like to borrow floating-rate dollars
and can borrow fixed-rate yen at 4.5% or floating-rate dollars at
LIBOR + 0.80%. What is the range of possible cost savings that
Google can realize through an interest rate/currency swap with
Panasonic?

28. Your firm can borrow at a fixed rate of 8% or a floating of
LIBOR+1%. You can also enter into a fixed-for-LIBOR swap where the
fixed rate (R%) is 7.7% in the exchange of LIBOR. Suppose that you
borrow at a fixed rate of 8% and then enter into the swap. What is
the net effect of the swap?
You can convert the fixed rate to a floating rate of
LIBOR+0.3%
You can convert the fixed rate to a...

Firm AAA can borrow at 5% fixed or in the floating-rate
market at LIBOR+0.5%. BBB can borrow at 7% fixed or at LIBOR+0.5%.
AAA wants to borrow floating and BBB fixed, so that they are
interested in entering into an interest-rate swap. What is the swap
fixed rate that is equally attractive to both firms? Assume that
there is no financial intermediary involved in the swap
transaction.
A)
7%
B)
6.5%
C)
6%
D) 5.5%

Firm AAA can borrow at 5% fixed or in the floating-rate market
at LIBOR+0.5%. BBB can borrow at 7% fixed or at LIBOR+0.5%. AAA
wants to borrow floating and BBB fixed, so that they are interested
in entering into an interest-rate swap. What is the swap fixed rate
that is equally attractive to both firms? Assume that there is no
financial intermediary involved in the swap transaction.
A)
7%
B)
6.5%
C)
6%
D) 5.5%

21. Firm AAA can borrow at 6% fixed or in the floating-rate
market at LIBOR flat. BBB can borrow at 7.5% fixed or at
LIBOR+0.5%. AAA wants to borrow floating and BBB fixed, so that
they are interested in entering into an interest-rate swap. What is
the swap fixed rate that is equally attractive to both firms?
Assume that there is no financial intermediary involved in the swap
transaction.
A) 7% B) 6.5% C) 6% D) 5.5%

Lost, Inc., a U.S. company, would like to borrow euros, whereas
Potter, Inc., a U.K. company, would like to borrow dollars. Lost
can borrow fixed-rate dollars at 2% or euros at 7%. Potter can
borrow dollars at 3% or euros at 8%. Can these firms use a currency
swap to lower their cost of debt? How do you know?

Consider the borrowing costs faced by the following three
companies:
Fixed Floating
A 5.0% LIBOR+0.6%
B 6.0% LIBOR+1.3%
C 7.0% LIBOR+2.5%
Assume if entering the swap transaction, they split the possible
savings equally.
A) Company A and B want to engage in the swap transaction. What
is the possible combined savings for both companies?
B) Suppose company C wants to borrow fixed rate funds. Is it
possible for C to reduce its cost of borrowing below 7%, and if so...

Company A, a lower-rated firm, desires a fixed-rate loan.
Company A presently has access to floating interest rate funds at a
margin of 1.7% over LIBOR. In contrast, company B, a higher-rated
firm, prefers a floating-rate loan. Company B has access to
fixed-rate funds at 11% and floating-rate funds at LIBOR+0.7%. Both
companies enter into an interest rate swap with Bank C. Based on
the swap, Bank C would gain 0.4% and each of the two companies
would gain 0.6%....

Consider two
companies, Alpha and Beta that can borrow at the rate indicated in
the table below. Assume Alpha desires floating-rate debt and Beta
desires fixed-rate debt. All interest rates are compounded
annually.
Alpha
Beta
Moody’s credit
rating
Aa
Baa
Fixed-rate
5.5%
7.0%
Floating-rate
LIBOR
LIBOR + 1%
Desires to pay at
Floating-rate
Fixed-rate
Estimate the feasibility of a swap arrangement by which the
companies can save interest payments and at the same time pay
floating- or fixed-interest payments consistent...

At time t, company A borrows 128 million yen at an interest rate
of 1.2% p.a., paid semiannually, for a period of 2 years. It then
enters into a 2-year swap at an exchange rate of JPY/USD 128. The
swap rates are 6-month USD LIBOR, and 1.3% p.a. compounded
semiannually in yen.
What are the payments on the loan, on the swap and on the
combination of them? Assume that 6-month LIBOR (annualized) evolves
as follows:
t + 6 /5.4%...

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