a)A U.K. company needs to raise AUD1,000,000. It plans to raise this money by issuing pound-denominated bonds
Question:
a)A U.K. company needs to raise AUD1,000,000. It plans to raise this money by issuing pound-denominated bonds and using a currency swap to convert the pounds to Australian dollars (AUD). The company expects interest rates in both the U.K. and Australia to rise.
i.Should the swap be structured with interest paid at a fixed or a floating rate? Justify your answer clearly.
[10 %]
ii.Should the swap be structured with interest received at a fixed or a floating rate? Justify your answer clearly.
hi i wrote this but I'm not sure its enough canyouexplain more to me so i can understand it fully? What i wrote:
i.the swap will structured with the interest paid at fixed rate why fixed rate?
because as mentioned above the interest rates are expected to increase we should agree to pay fix rate so even if the interest rate in future increase than also we will have to pay the predetermined fix rate hence it is better to borrow at fix rate.
ii. the swap be structured with interest received at a floating rate, but why?
because as mentioned above the interest rates are expcted to increase, so if we enter in swap agreement where we receive floating rate so we will get higher rate in future if the interest rate increase in future as per the given expectations.