International Business Chapter 14

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Chapter 14 Which combination of the following statements is true about a swap bank? (i) it is a generic term to describe a financial institution that facilitates swaps between counterparties (ii) it can be an international commercial bank (iii) it can be an investment bank (iv) it can be a merchant bank (v) it can be an independent operator (i) and (ii) (i), (ii) and (iii) (i), (ii), (iii) and (iv) (i), (ii), (iii), (iv) and (v) A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has agreed to one leg of the swap but company Y is "playing hard to get." If the swap bank has already contracted one leg of the swap, they should be hesitant to offer better terms to company Y. The swap bank could just buy the company X side of the swap. Company X should lobby Y to "get on board." If the swap bank has already contracted one leg of the swap, they should be eager to offer better terms to company Y to just get the deal done, and the swap bank could just sell the company X side of the swap. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here:

Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10% SOFR Company Y 12% SOFR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 at a rate of SOFR − 0.15 percent; in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. What is the value of this swap to company X? Company X will lose money on the deal. Company X will save 25 basis points per year on $10,000,000 = $25,000 per year. Company X will only break even on the deal. Company X will save 5 basis points per year on $10,000,000 = $5,000 per year. 10% + (SOFR − 0.15%) − 9.9% = SOFR − 0.05% Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here: Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10% SOFR Company Y 12% SOFR + 1.5% A swap bank proposes the following interest only swap: Y will pay the swap bank annual payments on $10,000,000 at a fixed rate of 9.90 percent. In exchange the swap bank will pay to company Y interest payments on $10,000,000 at SOFR − 0.15 percent; What is the value of this swap to company Y? Company Y will save 15 basis points per year on $10,000,000 = $15,000 per year. Company Y will save 45 basis points per year on $10,000,000 = $45,000 per year. Company Y will save 5 basis points per year on $10,000,000 = $5,000 per year. Company Y will only break even on the deal.

9.9% − (SOFR − 0.15%) + SOFR + 1.5% = 11.55%; 12% − 11.55% = 0.45%, or 45 basis points. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown here: Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10% SOFR Company Y 12% SOFR + 1.5% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of SOFR − 0.15 percent in exchange the swap bank will pay to company X interest payments on $10,000,000 at a fixed rate of 9.90 percent. Y will pay the swap bank interest payments on $10,000,000 at a fixed rate of 10.30 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of SOFR − 0.15 percent. What is the value of this swap to the swap bank? The swap bank will lose money on the deal. The swap bank will earn 40 basis points per year on $10,000,000 = $40,000 per year. The swap bank will break even. (SOFR − 0.15%) − (SOFR − 0.15%) + 10.3% − 9.9% = 0.4%, or 40 basis points. Use the following information to calculate the quality spread differential (QSD). Fixed-Rate Borrowing Cost Floating-Rate Borrowing Cost Company X 10% SOFR Company Y 12% SOFR + 1.5% 0.50 percent 1.00 percent 1.50 percent 2.00 percent

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Related Questions

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