Swaps

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rbcc

Junior Member
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Nov 18, 2009
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126
Hi, I'm not sure about this problem

Company A can borrow at 5% fixed or LIBOR + 5.9%

Company B can borrow at 2% or LIBOR+ 4.3%

Company A and B enter in to a swap where Company A Pays B a fixed payment and Company B pays A LIBOR.

If company A captures 20% of the savings how much can be saved?

so

5-2= 3% and L+5.9-L-4.3= 1.6%
3-1.6=1.4% is the total savings 20% of that is 0.0028%

So company A is able to save 0.0028%

Thank you,
Rbcc
 
At what fixed rate is company A paying company B? Or it part of the problem to find out what that fixed rate is?
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yup that's part of the problem

And is company B paying LIBOR with no mark-up?
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yes that's right
 
hmmm...

Company A borrows at 5% gives b F and receives L from B then the net payment would be 5+F-L so the savings are L+5.9-(5+F-L) = 5.9-5-F = 0.9-F= 20% of the savings

but from an intuition point of view, why do we need to know how much company A is giving to company B? if company A captures 40% of the savings from the swap, where does that factor in?? wouldn't F be determined by the amount of savings the company makes?? or am I completely wrong here...
 
we can borrow at 5%, right? So you want to borrow at LIBOR + 5.9%, pay something to company B, and get LIBOR back from B? Doesn't that mean we are going to pay 5.9% + plus the fixed payment when as an alternative we could just pay the 5% that a straight fixed-rate loan would cost? Please explain the benefit to me in very simple words, or get out of my office very quickly.
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lol sounds reasonable. I don't think this is about arbitrage

Ok so the method is more important to me than the actual numbers so lets pretend that everything is ok ( there may be something wrong with the question)

L+5.9-L+F=5.9+F
5-5.9-f= 0.9-F that's the savings for company A

the savings for company B
L+4.3+F-L=4.3+F
2-4.3-F= 2.3-F

then add them?
0.9-f + 2.3 -F= 3.2-2F

like that? now what?...(if all the numbers worked correctly)
 
Last edited:
ok, well I think I understand the method now, thank you for your help
 
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