Chapter 18, Problem 19QA

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).

(a) MSAF Ltd (MSAF) would need 3-month US$500,000 loan in two months' time to finance the importation of raw materials for production. MSAF can borrow in the Eurocurrency market at LIBOR plus 200 basis points. The LIBOR is currently sitting at 8%, but management of MSAF fear that interest rate might rise by the time the loan would be taken. To protect MSAF's interest rate risk exposure, management signs a forward rate agreement (FRA) deal with CAPUT Bank Plc. The FRA traded rate is set at 10% on the spot date. Required: i. Discuss three advantages of hedging interest rate risk with a forward rate agreement as against interest rate futures. ii. Suppose the LIBOR settles at 9% in two months' time, evaluate the outcome of the hedge.   (b) The PT Group is a multinational group of companies comprising the U.S. parent and three subsidiaries in other countries. Companies within the group trade amongst themselves, and settlement and currency issues have been a major concern. The PT Group has…

A sovereign borrower is considering a $100 million loan for a 4-year maturity. It will be an amortizing loan, meaning that the interest and principal payments will total, annually, to a constant amount over the maturity of the loan. There is, however, a debate over the appropriate interest rate. The borrower believes the appropriate rate for its current credit standing in the market today is 10%, but a number of international banks with which it is negotiating are arguing that is most likely 13%, at the minimum 10% What impact do these different interest rates have on the prospective annual payments?   the annual payment if the interest was 10% is _____? Please answer fast I give you upvote