QUESTION $1[25$ MARKS$]$

Two investment companies, K Ltd and V$-$Invest, have made investment decisions for

the next four years. K Ltd$$s objective is to invest in a capital market and it can achieve

this by investing at a fixed rate of $7\%$ or a floating of London Interbank Offered Rate

$($LIBOR$)+0\mathrm{.}1\%.$ V$-$Invest would like to invest in a project by borrowing at a fixed rate of

$8\mathrm{.}2\%$ or a floating rate of LIBOR $=0\mathrm{.}2\%.$ K has invested P$20$ million in an investment

scheme paying a floating rate of LIBOR $+0\mathrm{.}2\%.$ Both companies believe that they can

benefit by entering into a swap agreement. The swap dealer bank has agreed to set a

swap deal for them and is quoting interest swap at $7\mathrm{.}5\%-7\mathrm{.}8\%$ against LIBOR.

REQUIRED:

a$.$ Taking the swap dealer$$s fee into consideration, calculate the net swap

opportunity. $(4$ marks$)$

b$.$ Using a diagram, illustrate the swap deal between K Ltd and V$-$Invest Ltd$.$

$(11$ marks$)$

c$.$ Using a table, calculate the net cash flows for each company and calculate the

monetary value of the benefit or cost saving introduced by the swap deal.

$(10$ marks$)$