The treasurer of a British brewery is planning to enter a plain vanilla, three-year, quarterly settlement interest rate swap to pay a fixed rate of 8 percent and to receive three-month sterling LIBOR. But first he decides to check various cap-floor combinations to see if any might be preferable. A market maker in British pound sterling OTC options presents the treasurer with the following price list for three-year, quarterly settlement caps and floors:

In financial analysis of this sort, the treasurer assumes that the three-year cost of funds on fully amortizing debt would be about 8.20 percent (for quarterly payments). Should another structure be considered in lieu of the plain vanillaswap?

  • CreatedDecember 17, 2014
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