Question

Companies X and Y have been offered the following rates per annum on 1 million dollars of investments:

Company	Fixed Rate (in percent)	Floating Rate (in percent)
X	4.32%	Libor + 0.5
Y	5.54%	Libor + 0.6

Company X requires a fixed rate investment and company Y requires a floating rate investment. Design a swap that will net a bank acting as a financial intermediary (F.I.) 30 percent of the benefits and be equally attractive to both the companies. Draw a complete picture to show the exact transactions and check that the F.I., X, and Y are better off in your swap deal by receiving benefits exactly as asked.

Find the following in your swap scheme with all numerical values:

1. Benefit of swap in dollar per year.

2. Return on Y’s investment in capital markets in dollar per year

3. Receipt by F.I. from Y in dollar per year.

4. Receipt by X from F.I. in dollar per year

Answer 1

Company X requires a fixed rate investment which means they have invested in floating rate
Company Y requires a floating rate investment which means they have invested in fixed rate
Y yill get 5.54% return from original Investee
X will get Libor+0.5% return from original Investee
Y will transfer to X Company 4.32%+ profit of 0.41%
Y will transfer to Financial Intermediary 0.30%
X Company will transfer entire Libor +0.5% to Y Company
So Y Compay's Effective rate = 5.54% - 4.73% - 0.3% + Receipt from X Company Libor+0.5%
Effective Rate = Libor + 1.1%
Effective Rate of X Company = 4.73% from Y Company + Libor+.5% -(Libor +.5%) = 4.73%
	Difference in fixed rate = 5.54% - 4.32% = 1.22%
	Difference in floating rate = Libor+0.6% - Libor+0.5% = 0.1%
	So net benefit from Swp = 1.12%
Answet to Question 1. Benefit of swap in dollar per year = $1million X 1.12%					$11,200.00
Answer to Question 2. Return on Y’s investment in capital markets in dollar per year
	Y Company's original rate = 5.54%
	then their return in capital market = $1 million X 5.54% =				$55,400.00
Answer to Question 3. Receipt by F.I. from Y in dollar per year.
		their fee is 0.3%, so $1million X 0.3%			$3,000.00
		Total Receipt by F.I. from Y in dollar per year.			$46,200.00
Answer to Question 4. Receipt by X from F.I. in dollar per year
	Receipt from Company Y To reimburse X Company @4.32%				$43,200.00
	This will be transferred to Company X by Financial Intermediary

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