Kath and Kim each wish to borrow $5 million for five years, but Kath prefers to...
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Kath and Kim each wish to borrow $5 million for five years, but Kath prefers to borrow at floating rate while Kim prefers fixed. However, Kath has a higher credit rating and has an absolute advantage in borrowing at both floating and fixed rate. They have obtained the following quotations for borrowing: Fixed Rate Floating Rate Kath Kim 3% p.a. Libor 0.15% p.a. 4% p.a. Libor +0.35% p.a. A swap dealer quotes a mid-rate of 3.45% p.a. against Libor and pays 5 basis points less than the mid-rate and receives 5 basis points more. E Kath Swap Dealer A B Kim D F i) Design an on-market plain vanilla swap which will reduce both Kath and Kim's borrowing costs and provide them with their preferred form of borrowing. Indicate what values are required for the letters A to F on the above diagram. ii) By engaging in this swap, how much will Kim be able to reduce her cost of borrowing below the market alternative for her preferred borrowing type? Kath and Kim each wish to borrow $5 million for five years, but Kath prefers to borrow at floating rate while Kim prefers fixed. However, Kath has a higher credit rating and has an absolute advantage in borrowing at both floating and fixed rate. They have obtained the following quotations for borrowing: Fixed Rate Floating Rate Kath Kim 3% p.a. Libor 0.15% p.a. 4% p.a. Libor +0.35% p.a. A swap dealer quotes a mid-rate of 3.45% p.a. against Libor and pays 5 basis points less than the mid-rate and receives 5 basis points more. E Kath Swap Dealer A B Kim D F i) Design an on-market plain vanilla swap which will reduce both Kath and Kim's borrowing costs and provide them with their preferred form of borrowing. Indicate what values are required for the letters A to F on the above diagram. ii) By engaging in this swap, how much will Kim be able to reduce her cost of borrowing below the market alternative for her preferred borrowing type?
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Answer rating: 100% (QA)
Designing a Plain Vanilla Swap for Kath and Kim Heres a plan for an onmarket plain vanilla swap that benefits both Kath and Kim The Swap Structure Kat... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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