14-47

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Chapter 3 / Exercise 46

**Mathematical Applications for the Management, Life, and Social Sciences**

Harshbarger

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Chapter 14 Interest Rate and Currency Swaps20. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below:A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat. Assume both X and Y agree to the swap bank's terms.Fill in the values for A, B, C, D, E, & F on the diagram.

Chapter 14 Interest Rate and Currency Swaps21. Company X wants to borrow $10,000,000 floating for 5 years. Company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are:Design a mutually beneficial interest only swap for X and Y with a notational principal of $10 million by having appropriate values forA = Company X's external borrowing rateB = Company Y's payment to X (rate)C = Company X's payment to Y (rate)D = Company Y's external borrowing rate

Chapter 14 Interest Rate and Currency Swaps22. Suppose ABC Investment Banker, Ltd. is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for dollars, and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling. ABC would enter into a $/≤currency swap in which:

≤

23. Use the following information to calculate the quality spread differential (QSD):A.0.50%B. 1.00%C. 1.50%D. 2.00%The QSD = (12% - 10%) - (LIBOR + 1.5% - LIBOR) = 0.50%14-50

Chapter 14 Interest Rate and Currency Swaps24. Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are shown below:A swap bank is involved and quotes the following rates five-year dollar interest rate swaps at 10.05%-10.45% against LIBOR flat.Assume company Y has agreed, but company X will only agree to the swap if the bank offers better terms.What are the absolute best terms the bank can offer X, given that it already booked Y?A.10.45%-10.45% against LIBOR flat.B. 10.45%-10.05% against LIBOR flat.C. 10.50%-10.50% against LIBOR flatD. none of the aboveThe QSD is only 50 basis points, and Y has claimed 5 of them. That leaves 45 left if the swap bank is willing to give it all away just to get the deal done we have:14-51

Chapter 14 Interest Rate and Currency Swaps