The treasurer of a British brewery is planning to enter a plain vanilla, three-year, quarterly settlement interest

Question:

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?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 50% (12 reviews)

The key is to recognize that the combination of buying the cap and writing a floor at the same strike rate generates the same settlement cash flows as ...View the full answer

Answered By

Asim farooq

I have done MS finance and expertise in the field of Accounting, finance, cost accounting, security analysis and portfolio management and management, MS office is at my fingertips, I want my client to take advantage of my practical knowledge. I have been mentoring my client on a freelancer website from last two years, Currently I am working in Telecom company as a financial analyst and before that working as an accountant with Pepsi for one year. I also join a nonprofit organization as a finance assistant to my job duties are making payment to client after tax calculation, I have started my professional career from teaching I was teaching to a master's level student for two years in the evening. My Expert Service Financial accounting, Financial management, Cost accounting, Human resource management, Business communication and report writing. Financial accounting : • Journal entries • Financial statements including balance sheet, Profit & Loss account, Cash flow statement • Adjustment entries • Ratio analysis • Accounting concepts • Single entry accounting • Double entry accounting • Bills of exchange • Bank reconciliation statements Cost accounting : • Budgeting • Job order costing • Process costing • Cost of goods sold Financial management : • Capital budgeting • Net Present Value (NPV) • Internal Rate of Return (IRR) • Payback period • Discounted cash flows • Financial analysis • Capital assets pricing model • Simple interest, Compound interest & annuities

4.40+ 65+ Reviews 86+ Question Solved

Related Book For book-img-for-question

Investment Analysis and Portfolio Management

ISBN: 978-0538482387

10th Edition

Authors: Frank K. Reilly, Keith C. Brown

See More Books

Question Posted: Dec 17, 2014 10:48 AM

See More Questions

The treasurer of a British brewery is planning to enter a plain vanilla, three-year, quarterly settlement interest

Question:

INTEREST RATE CAPS INTEREST RATE FLOORS Strike Rate 7% 8% 996 Buy 582 GBP 398 205 Sell 597 GBP 413 220 Buy 320 GBP 401 502 Sell 335 GBP 416 517

Step by Step Answer:

The key is to recognize that the combination of buying the cap and writing a floor at the same strike rate generates the same settlement cash flows as ...View the full answer

Investment Analysis and Portfolio Management

Students also viewed these Accounting questions