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International Financial Management

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 32QA

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Use the following table to answer this question:
Fixed Floating
LIBOR+.5
Firm AAA 10%%
LIBOR+3
Firm BBB 11%%
Spread
Assume firm AAA wants a fixed rate loan and BBB wants
a floating rate loan.
Design a swap that is equally attractive to both firms.
Draw the swap diagram and show all the cash flows like we
did in class.

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Use the following information for the next two questions. Firms X and Y have the following borrowing costs: Company X Company Y Fixed-Rate Borrowing Costs Floating-Rate Borrowing Costs 9.5% 7.5% LIBOR +1.25% LIBOR A swap bank offer the following quote for an interest only swap: 7.1-7.6 (against LIBOR) 1) X wants a fixed loan. What would be their all in cost if instead of getting a fixed loan directly they initially get a floating loan and swap it using the above quote? a. 8.5% b. 8.85% C. 8.95% d. 8.65% e. None of the above
Company H is a high credit-worthy borrower. Company L is a low credit-worthy borrower. Their preference, status, and borrowing opportunities are shown below: Company Preferred Currently Floating Rate Borrowing Cost Fixed Rate Rate Borrowing at. Borrowing Cost H. Floating Fixed 4.25% PRIME Fixed Floating 6.25% PRIME + 0.50% Suppose the OSD is equally shared between H, L and the swap dealer. If the swap dealer receives PRIME from H, what should the swap dealer pay to H? O Prime- 0.75 % O Prime + 0.33% 4.25% 4.75%.
. Answer the following in a couple of sentences d) Compare swaps with forwards f) Why do you buy on margin?
Answer the following in a couple of sentences. e) Compare swaps with forwards f) Why do you buy on margin?
A firm can issue one of the listed products and convert them into the floating rate using IR swaps (LIBOR for 3.7% fixed). What is the lowest floating rate that the firm can get? Fixed rate note: 4% Simple FRN: L + 0.5% Inverse floater: 7.6% - L (e.g., if we can pay only L + 0.1% that would be great, but can we obtain such a low rate?) a.) L + 0.1% b.) L + 0.2% c.) L + 0.3% d.) L + 0.5%
This is part a) question and it's answer in order to answer part b) question Question: You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? answer : According to the question we need to calculate the current price of the perpetual consol. Perpetual consoles are priced differently because their expected income is spread through an indefinite period. So, perpetual consoles are priced using the current yield. The current yield is calculated as:- coupon amountMarket price×100coupon amountMarket price×100 After calculating the current yield price is calculated by the above formula where, i = Current interest rate y = yield so, the price of this consol will be Price = i/y I please need the solutions for part b) question b) In the next period however, the interest rate changes unexpectedly to i . What is the new price of the bond? If…
2. Denote by Cn and P calls and puts with strike price K 240 and exercise date N = 1. Let the bank account be Bn = e", with r = 0.05 and let the underlying cost So = 250. Assume that Co 75 and Po = 70. Check whether NA holds. If NA does not hold, propose an %3D arbitrage strategy.
You are an analyst at a local bank and one of your corporate customers is interested in fixed rate USD funding. Your bank desires TTD funding. The following borrowing costs are available: BORROWING COSTS Local FIRM Local BANK FIXED USD 6% 4.5% FLOATING USD LIBOR + 1% LIBOR FIXED TTD 4% 3.5% A Can a swap be structured that benefits both parties? Illustrate how a swap can be structured to benefit both partied and calculate the effective rates assuming gains are divided equally?
Suppose that the lending rate re and the borrowing rate r, under continuous compounding are different for investors so that re < rp. Show that the no-arbitrage forward price F(0,T) satisfies Soe"T < F(0,T) < Soe™%T.
explain how an interest rate swap can help investors to transform assets. Use appropriate examples and diagrams to explain your answer. (200word)
. Suppose interest rates are increasing enough that it can be modeled with r →∞.(a) What is the value of a Call?(b) What is the value of a Put?(c) Explain both answers in terms of finance.
A firm can issue one of the listed products and convert them into the floating rate using IR swaps (LIBOR for 3.7% fixed). What is the lowest floating rate that the firm can get? Fixed rate note: 4% Simple FRN: L+ 0.5% Inverse floater: 7.6% - L Question 6 options: L+ 0.1% L+ 0.2% L+ 0.3% L+ 0.5%

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