Question

What are the gains from trade of entering into a swap for these two firms?                              &nbsp

What are the gains from trade of entering into a swap for these two firms?

                                     Firm A                                       Firm B

Fixed Rate                        9%                                         5%

Floating Rate              LIBOR + 7%                             LIBOR + 4%

Ans. Gains from trade are 1%. (I dont know how to get this answer)

Possible further question: How to arrange a swap contract so that Firm A earns 0.6% from it?

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Gain to firm A 60% is only possible when firm a and firm b share in ratio of 60:40.

Add a comment
Know the answer?
Add Answer to:
What are the gains from trade of entering into a swap for these two firms?                              &nbsp
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Finance

    SBC Inc. needs floating rate dollars, which it can borrow at LIBOR + 1%. Fixed rate dollars are available to the firm at 8.0% per year. CCS Steel Corp. can borrow fixed-rate dollars at annual rate of 11% or floating rate dollars at LIBOR + 2% per year. CCS would prefer to borrow fixed rate dollars. Is it possible to arrange a swap agreement so that both firms benefit equally from the swap? If yes, explain how much SBC would...

  • Two firms are offered the following rates for their 5-year investment per annum on a $20...

    Two firms are offered the following rates for their 5-year investment per annum on a $20 million: Fixed Floating Firm A 12.00% LIBOR+0.1% Firm B 13.4% LIBOR+0.6% A wants a fixed-rate investment and B wants a floating-rate investment. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally attractive to both A and B.

  • Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding...

    Two firms X and Y are able to borrow funds as follows: Firm A: Fixed-rate funding at 3.5% and floating rate at Libor-1%. Firm B: Fixed-rate funding at 4.5% and floating rate at Libor+2%. Assume A prefers fixed rate and B prefers floating rate. Show how these two firms can both obtain cheaper financing using a swap. What swap strategy would you suggest to the two firms if you were an unbiased advisor? What is the net cost to each...

  • 16. A U.S. corporation is considering entering into a currency swap that will call for the...

    16. A U.S. corporation is considering entering into a currency swap that will call for the firm to pay dollars and receive British pounds. The dollar notional amount will be $35 million. The swap will call for semiannual payments using the adjustment 180/360. The exchange rate is $1.60. The term structures of dollar LIBOR and pound LIBOR are as follows: 1 Term 90 da 180 da Da ys 180 360 540 720 Dollar LIBOR (%) 7.00 7.25 7.45 7.55 Pound...

  • Consider the currency Swap between firm A and firm B. Firm A is able to borrow...

    Consider the currency Swap between firm A and firm B. Firm A is able to borrow in the European market at 8.75% per annum (fixed rate) and at the floating rate of LIBOR - 0.25%. Firm B is able to borrow in the fixed market rate equal to 9.50% and at the floating rate of LIBOR + 1.10%. Which of the following is true? Select one: a. The swap between A and B is mutually advantageous and reflects a case...

  • Cement Al-Yamamah has just entered into a two-year floating-for-fixed swap contract, where payments are made every...

    Cement Al-Yamamah has just entered into a two-year floating-for-fixed swap contract, where payments are made every six months. The 6-month LIBOR is 4.11%. The 6 to 12 months forward LIBOR rate is 5.92% and the 12 to 18 month forward LIBOR rate is 8.19. The two-year swap rate is 5.1%. If the OIS rate is 3.5% and the term structure of the OIS rate is flat, what is the 18 to 24 month Forward LIBOR rate? All rates are semi-annually...

  • E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc....

    E9.13 Interest Rate Swap: Profit and Default On July 1, 2020, Queen Corp. and Prince, Inc. entered into an interest rate swap on a notional amount of $1 million. They accepted the following offer of Intermediary: To Intermediary from Queen ..... To Intermediary from Prince...... To Queen from Intermediary .... To Prince from Intermediary......... LIBOR + 30 (floating) 2.4% (fixed) 2.3% (fixed) LIBOR + 20 (floating) ........ At inception of the swap, LIBOR = 2.3 percent. Due to an increase...

  • Swap contract - from a banker's perspective Suppose Firm A can issue 7-years bonds in Germany...

    Swap contract - from a banker's perspective Suppose Firm A can issue 7-years bonds in Germany at the fixed rate of 3% and in the U.S. at 8%. Suppose Firm B can issue 7-years bonds at the fixed rate of 5% in Germany and at 9% in the United States. (a) Which firm has a comparative advantage in the U.S. capital market? (b) How would you advise both firms so that they take advantage of each other's comparative advantage in...

  • There are two companies, A and B. They have the following fixed and floating borrowing costs:...

    There are two companies, A and B. They have the following fixed and floating borrowing costs: A B Fixed rate borrowing 4.5% 6% Floating rate borrowing LIBOR LIBOR + .75% A plans to borrow floating rate from Bank X and B plans to borrow fixed from Bank Y. Both companies are taking 5 year $100,000,000 loans with quarterly payments. A and B will then enter a swap contract with each other. (a) Design a fixed-for-floating swap in which A and...

  • International Oil plc is interested in raising £100 million in order to carry out further oil...

    International Oil plc is interested in raising £100 million in order to carry out further oil exploration. International oil is an AA-rated company and, as such can borrow for 12 months at a fixed rate of 12 per cent or a floating rate of LIBOR +30 basis points. London Property Ltd has a lower credit rating, and wishes to raise a similar sum for investment in the housing market. London Property can only borrow at a fixed interest rate of...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT