Companies WMM and KLL have been offered the following rates per annum on a $50 million...

  

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Companies WMM and KLL have been offered the following rates per annum on a $50 million 5-year investment, shown in Exhibit 3. KLL requires a fixed-rate investment while WMM wishes to invest at a floating rate of interest. WMM KLL Exhibit 3: Interest rates Fixed Rate 3.6% 4.2% Floating Rate LIBOR-1% LIBOR +2% This task requires you to design a vanilla swap that allocates 65% advantage (i.e. gain) to WMM and 35% advantage (i.e. gain) to KLL. Assume that a financial institution, acting as an intermediary, is planning to charge a 0.3% premium. Assume that today is 15th June 2021, the two companies enter the $50 million 5-year swap you have designed in Task 3.1. The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. Assume that today is 15th June 2021, the two companies enter the $50 million 5-year swap you have designed in Task 3.1. The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. The accrual period is the actual number of days divided by 360. Your task is to complete the Template (Exhibit 4) below, which demonstrates the cash flows on the swap from the perspective of WMM. LIBOR Days in Date WMM receives WMM Net cash pays flow to (%) period (S) (S) WMM (S) 15/06/2021 2.5 15/12/2021 3.1 15/06/2022 3.4 15/12/2022 2.6 15/06/2023 2.8 15/12/2023 1.5 15/06/2024 2.6 15/12/2024 2.9 15/06/2025 1.8 15/12/2025 2.9 15/06/2026 Companies WMM and KLL have been offered the following rates per annum on a $50 million 5-year investment, shown in Exhibit 3. KLL requires a fixed-rate investment while WMM wishes to invest at a floating rate of interest. WMM KLL Exhibit 3: Interest rates Fixed Rate 3.6% 4.2% Floating Rate LIBOR-1% LIBOR +2% This task requires you to design a vanilla swap that allocates 65% advantage (i.e. gain) to WMM and 35% advantage (i.e. gain) to KLL. Assume that a financial institution, acting as an intermediary, is planning to charge a 0.3% premium. Assume that today is 15th June 2021, the two companies enter the $50 million 5-year swap you have designed in Task 3.1. The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. Assume that today is 15th June 2021, the two companies enter the $50 million 5-year swap you have designed in Task 3.1. The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. The accrual period is the actual number of days divided by 360. Your task is to complete the Template (Exhibit 4) below, which demonstrates the cash flows on the swap from the perspective of WMM. LIBOR Days in Date WMM receives WMM Net cash pays flow to (%) period (S) (S) WMM (S) 15/06/2021 2.5 15/12/2021 3.1 15/06/2022 3.4 15/12/2022 2.6 15/06/2023 2.8 15/12/2023 1.5 15/06/2024 2.6 15/12/2024 2.9 15/06/2025 1.8 15/12/2025 2.9 15/06/2026

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To design a vanilla swap that allocates a 65 advantage to WMM and a 35 advantage to KLL we can struc... View the full answer