John is an investment officer for a local £500m of investments. Johns's mandate limits him to only investing in interest-bearing securities and deposits, though he is allowed to use interest rate derivatives.
With 3-month Sterling Libor at 0.50%, John is trying to generate enough income from his investments to fund the cash requirements of the locals. ideally, he likes to earn at least 2.5%. John seeks the advice of a bank as to how he can enhance the yield on his cash using interest rate derivatives and structured products.

a. Considering you work for the bank and under the above constraints, propose 3 significantly different solutions to John’s problem. In each case outline the details and workings as well as the risks involved.
b. Which of these 3 solutions would you recommend and why? Take into account different elements, potential return, risk, etc.

Answer rating: 100% (QA)

PART 1 1 Interest rate swap John could enter into an interest rate swap with a counterparty where he agrees to exchange a fixed rate of interest for a ... View the full answer