2 Suppose the quote for a five-year swap with semiannualpayments is 8.50-8.60 percent in dollar against dollar LIBOR(London Interbank Offered Rate) flat. It meansO the swap bank will pay semiannual fixed-rate dollar payments of8.60 percent against receiving six-month dollar LIBORO The swap bank stands ready to pay 8.60 percent against receivingdollar LIBOR on five-year loansthe swap bank will receive semiannual fixed-rate dollar paymentsof 8.50 percent against paying six-month dollar LIBORO if the swap bank is successful in getting counterparties to bothlegs of the swap at these prices, the bank will have an annualprofit of ten basis points

Swap Bank A swap bank acts as an intermediary between the two counterparties who want to enter into…

Answered: Suppose the quote for a five-year swap…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 38QA

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Similar questions

Suppose that a bank has agreed to the following terms of an interest rate swap:- The notional principal is CAD 300 million and the remaining life of the swap is 11 months.- The bank pays 8% per annum, and receives three-month LIBOR.- Payments are exchanged every three months.- The swap (fixed) rate is 11% per annum for all maturities.- The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAs-based method?
Current USD Interest rates are 7% per annum and AUD rates are 9% per annum, flat for all terms. Current value of AUD is 0.62 USD. Under a FX swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. Notional principals are 12 Million USD and 20 Million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 5 more years. What is the value of the swap to the financial institution?
DVR Inc. can borrow dollars for five years at a coupon rate of 2.84 percent. Alternatively, it can borrow yen for five years at a rate of .94 percent. The five-year yen swap rates are 0.73–0.70 percent and the dollar swap rates are 2.50–2.53 percent. The currency ¥/$ exchange rate is 87.620. Determine the dollar AIC and the dollar cash flow that DVR Inc. would have to pay under a currency swap where it borrows ¥1,750,000,000 and swaps the debt service into dollars. Borrow: Swap:Provide accurate solution with explanation of all the requirements. Use excel calculations with excel formulas. Provide solution ASAP.
Consider a $10,000,000 1-year quarterly-pay swap with a fixed rate of 4.5% and a floating rate of 90-day LondonInterbank Offered Rate (LIBOR) plus 150 basis points. 90-day LIBOR is currently 3% and the current forward ratesfor the next four quarters are 3.2%, 3.6%, 3.8%, and 4%. If these rates are actually realized, at the second quarterlysettlement date, the fixed-rate payer in the swap will:a. receive a payment of $5,000b. receive a payment of $5,000c. receive a payment of $7,500d. neither make nor receive a payment
Suppose a bank enters a repurchase agreerment in which it agrees to sell Treasury securities to a correspondent bank at a price of $9.99,838 with the promise to buy them back at a price of $10.000,073. Calculate the yield on the repo if it has a 6-day maturity. (write your answer in percentage and round it to 2 decimal places)
Company A and B have been offered the following rates per annum on a £50 million, 10 - year loan. Company A borrows at a fixed rate of 6% and floating rate of (LIBOR + 0.4)%. Company B borrows at a fixed rate of 7% and a floating rate of (LIBOR + 0.6)%. a) Company A requires a floating rate loan, whereas company B requires a fixed rate loan. In which market does company A have a comparative advantage? Design at least two different swaps that will give a bank, acting as an intermediary 0.6% p.a. and that will appear equally attractive to both companies. Explain how to achieve this, using diagrams and text. b) Design a Swap that is the most beneficial to company A. Explain using text and diagram. c) Suppose that company A has an asset worth £10 million yielding an interest of 7%. Suppose that A is a company based in Japan. Explain how it can use a currency swap to transform the asset to an asset paying Yen (currency in Japan).
The nominal yield on 6-month T-bills is 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 4.5%. In the spot exchange market, 1 yen equals $0.012. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations. Round your answer to five decimal places.
Company X and Company Y have been offered for the following rates per annum on a RM30 million 5-year loan. Company X Company Y Fixed rate 12.5% 12.5% Floating rate 3-month KLIBOR+2% 3-month KLIBOR + 2.75% Preferred loan Fixed rate Floating rate You work for KL Bank, and thinks that the quoted rate are arbitrageable by means of an interest rate swap. Design a fixed-for-floating interest rate swap. Show the percentage gain to each party, assuming that the mispricing is split equally among three parties.
A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on £20 million for interest at 6% on $30 million once a year. The term structure of risk-free interest rates in the United Kingdom is flat at 7% and the term structure of risk-free rates in the United States is flat at 4% (both with annual compounding). The current exchange rate (dollars per pound sterling) is 1.5500. What is the value of the swap to the party paying sterling? What is the value of the swap to the party paying dollars?
The following are the spot and the swap forward rates of the ZAR/EUR Spot 15.7500–15.9500 One-month 400–205 This means that the rand is selling at a forward discount. the rand is selling at a forward premium. the euro dollar is selling at a forward discount. Both b) and c) after allowing for transaction costs, both currencies sell at par.
The nominal yield on 6-month T-bills is 8%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 3.5%. In the spot exchange market, 1 yen equals $0.008. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places. Do not round intermediate calculations.

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