Silverman Sachs has entered into a five year SWAP contract agreeing to pay a fixed rate of 4.75% per year and receive LIBOR in return. Silverman Sachs can purchase Government bonds with a coupon of 4.63% per year and the purchase of the Government bonds can be financed at the REPO rate (floating rate). The REPO rate is set to LIBOR – 12 bps. Can Silverman Sachs make an arbitrage profit (ignore transaction costs?

Answer rating: 100% (QA)

To determine whether Silverman Sachs can make an arbitrage profit from this swap arrangement lets break down the components of the transaction Swap Co... View the full answer