2. The following questions relate to the structuring of swaps: (a) Can a profitable swap be...

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2. The following questions relate to the structuring of swaps: (a) Can a profitable swap be arranged in the situation that follows? Explain your reasoning. (b) Debt Market Fixed Floating Firm G Firm H 4.186% 4.236% BBSW+ 0.031% BBSW+ 0.081% Can a profitable swap be arranged in the situation that follows? Explain your reasoning. () (d) Debt Market Firm L Firm M 4.524% BBSW+ 4.549% 0.957% BBSW+ 0.992% Fixed Floating Outline the details of a swap involving L and M (as per part (b) above) where the benefits of the swap were equally distributed between L and M. In your outline identify which firm borrows fixed and which firm borrows floating and the respective rates that they would borrow at. Provide your outline in both a graphical and table format. (ANSWER: Overall borrowing cost to Firm L as a result of the swap is 4.519%) For question (c) you have calculated the payments between the two firms: with one firm paying fixed and the other firm paying floating. As its name suggests, the floating rate payment will vary according to the value of the bank bill swap rate (BBSW). In this question you are asked to calculate the payments between the two firms on an interest payment date where the following applies: the bank bill issued by the floating rate borrower is a 180 day bank bill, the 180 day BBSW is 2.525%, interest on the fixed rate borrowing is paid semi-annually, and the principal sum is $7.5 million Given that a net payment would be made, which party would make the payment? How much would the payment be? (ANSWER: Firm L will pay $38,887.50 to Firm M) Outline the specifics of a swap involving L and M where 70% of the benefit of the swap accrued to L and 30% to M. Comment on whether this 70:30 distribution of benefits is a realistic assumption to make in practice. (ANSWER: Overall cost to Firm M as a result of the swap will be BBSW+0.989%) 2. The following questions relate to the structuring of swaps: (a) Can a profitable swap be arranged in the situation that follows? Explain your reasoning. (b) Debt Market Fixed Floating Firm G Firm H 4.186% 4.236% BBSW+ 0.031% BBSW+ 0.081% Can a profitable swap be arranged in the situation that follows? Explain your reasoning. () (d) Debt Market Firm L Firm M 4.524% BBSW+ 4.549% 0.957% BBSW+ 0.992% Fixed Floating Outline the details of a swap involving L and M (as per part (b) above) where the benefits of the swap were equally distributed between L and M. In your outline identify which firm borrows fixed and which firm borrows floating and the respective rates that they would borrow at. Provide your outline in both a graphical and table format. (ANSWER: Overall borrowing cost to Firm L as a result of the swap is 4.519%) For question (c) you have calculated the payments between the two firms: with one firm paying fixed and the other firm paying floating. As its name suggests, the floating rate payment will vary according to the value of the bank bill swap rate (BBSW). In this question you are asked to calculate the payments between the two firms on an interest payment date where the following applies: the bank bill issued by the floating rate borrower is a 180 day bank bill, the 180 day BBSW is 2.525%, interest on the fixed rate borrowing is paid semi-annually, and the principal sum is $7.5 million Given that a net payment would be made, which party would make the payment? How much would the payment be? (ANSWER: Firm L will pay $38,887.50 to Firm M) Outline the specifics of a swap involving L and M where 70% of the benefit of the swap accrued to L and 30% to M. Comment on whether this 70:30 distribution of benefits is a realistic assumption to make in practice. (ANSWER: Overall cost to Firm M as a result of the swap will be BBSW+0.989%)