Poke Ltd and Ash Corporation negotiate a $15 million, 5-year interest-rate swap in in which Poke will
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Question:
Poke Ltd and Ash Corporation negotiate a $15 million, 5-year interest-rate swap in in which Poke will pay 4.25% fixed rate to Ash and Ash will pay Libor to Poke (there is no swap dealer involved). The firms will net payments half-yearly. Poke generally pays Libor plus 20 basis points for borrowing and Ash borrows at 4.10%.
Determine the "all-in-cost" for Poke and Ash. It may be useful to have a diagram showing the payment responsibilities of each firm.
Suppose after two years the market is offering a swap rate of 3.25% against Libor. A swap dealer offers to take the swap off Poke's hands. How much will Poke have to pay the dealer?
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