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US$ (floating)
LIBOR+0.5%
Canadian $ (fixed) 5%
B
LIBOR+1%
6.5%
Assume A wants to borrow US dollars at a floating rate and B wants to
borrow Canadian dollars at a fixed rate. A financial institution is planning to
arrange a swap and requires a 50 basis point spread. If the swap is equally
attractive to A and B, how do we have to set up the swap that A and B are
not carrying any exchange rate risk?
3) Companies with high credit risks are the ones that cannot access fixed-rate
markets directly. They are the companies that are most likely to be paying
fixed and receiving floating in an interest rate swap. Assume the statement
is true. Do you think this increases or decreases the risk of a financial
institutions swap portfolio? Assume that in general companies are most
likely to default when interest rates are high.
4) Alpha and Beta Companies can borrow for a five-year term at the following
rates:
Alpha
Beta
Aa
Baa
10.5%
12.0%
LIBOR
LIBOR + 1%