In: Finance
NFLX wants to lower their fixed rate borrowing costs. This means
NFLX wants to borrow fixed.
To maximize the profit, company NFLX will borrow at variable rate.
Thereafter it will enter into a Swap where NFLX will pay variable
and receive fixed rate.
Interest rate without the swap is 3.5%.
Calculation of Interest rate with the swap :
Company A will borrow at Libor + 0.25%
After this it will enter into a swap, paying 3m Libor and
receiving fixed.
Inflow = Libor
Outflow = 3.15%
Net Outflow for NFLX with swap option = Libor + 0.25% - Libor +
3.15%
= 3.40%
Savings in annual interest rate option because of Swap = Total Interest Rate without Swap – Total Interest Rate with Swap
= 3.50% - 3.40%
= 0.10%
Option b. is correct. Borrow in the floating market, pay on a 2-year swap and save 0.10%