Question

In: Accounting

1. Assume that you are a swap dealer and have just acted as a counterparty in...

1. Assume that you are a swap dealer and have just acted as a counterparty in an interest rate swap. The notional principal for the swap was $7.5 million and you are now obligated to make five annual payments of 8% interest. The floating rate that you will receive annually is LIBOR + 2%.
(a.) If the LIBOR is 6.2% and does not change over the next 5 years, what will be your annual net inflow?
(b.) What is the net present value of your swap agreement at a discount rate of 8%?
(c.) If the floating rate stays the same for the first two years and then falls by 1.5%, what will be your net payments for the five years? Calculate the present value of the cash flows at a discount rate of 8%.
2. A swap agreement covers a 5-year period and involves annual interest payments on a JPY1 million principal amount. Party A agrees to pay a fixed rate of 10% to Party B; while Party B agrees to pay a floating rate of LIBOR + 2% to Party A. The LIBOR is 9% at the time of the first payment. What is the net payment between the two interest obligations?
3. Assume that the current spot rate for the Swiss franc is SF 1.5/$, the US interest rate is 9%, and the Swiss interest rate is 8%. Firm X wishes to exchange 30 million Swiss francs for dollars. In return for these Swiss francs, Firm Y would pay $20 million to Firm X at the initiation of the swap. The term of the swap is three years and the two firms will make annual interest payments. If the spot rate at the end of year 1 changes to SF1.7/$, what is the net payment for year 1?

Solutions

Expert Solution

1.

Notional principal                           7,500,000
Fixed rate 8%
Floating rate LIBOR + 2%
a) & b)
LIBOR = 6.2%
Year Fixed interest(outflow)
8%
Floating interest(inflow)
(6.2%+2%=8.2%)
Annual Net Inflow PVAF@8% PV Cash inflows
1                              600,000                               615,000       15,000 0.9259         13,889
2                              600,000                               615,000       15,000 0.8573         12,860
3                              600,000                               615,000       15,000 0.7938         11,907
4                              600,000                               615,000       15,000 0.7350         11,025
5                              600,000                               615,000       15,000 0.6806         10,209
        59,891
c)
LIBOR = 6.2% for 2 years and 4.7% for rest of the years
Year Fixed interest(outflow)
8%
Floating interest(inflow)
8.2%;6.7%
Annual Net Inflow PVAF@8% PV Cash inflows
1                              600,000                               615,000       15,000 0.9259         13,889
2                              600,000                               615,000       15,000 0.8573         12,860
3                              600,000                               502,500     (97,500) 0.7938       (77,399)
4                              600,000                               502,500     (97,500) 0.7350       (71,665)
5                              600,000                               502,500     (97,500) 0.6806       (66,357)
    (188,672)

2.

Party A pays to Party B a fixed rate of 10%. In return, Party B pays LIBOR + 2% to party A.

Notional principal =JPY 1,000,000
LIBOR (given) = 9%
Floating rate = 9%+2% = 11%
Party A Party B
Fixed interest (10%*1000000)                            (100,000)                              (110,000)
Floating interest (11%*1000000)                              110,000                               100,000
Net payment                                10,000                                (10,000)

3.

Particulars CHF
X pays interest on dollar loan ($20*9%*1.7)                           3,060,000
X receives Interest in CHF from Y (CHF30*8%)                           2,400,000
Net payment by X                              660,000
$
Y pays interest in CHF (CHF30*8%/1.7)                           1,411,765
Y receives Interest in $ from Y ($20*9%)                           1,800,000
Net Receipt by Y                              388,235

Related Solutions

Assume that you are a swap dealer and have just acted as a counterparty in an...
Assume that you are a swap dealer and have just acted as a counterparty in an interest rate swap. The notional principal for the swap was $7.5 million and you are now obligated to make five annual payments of 8% interest. The floating rate that you will receive annually is LIBOR + 2%. (a.) If the LIBOR is 6.2% and does not change over the next 5 years, what will be your annual net inflow? (b.) What is the net...
German company and the swap dealer pays and receives under the swap contract that satisfies the...
German company and the swap dealer pays and receives under the swap contract that satisfies the following:  The same swap dealer is involved in this currency swap with the US company and the German company.  The US company’s net borrowing cost is 5.2% p.a. on $ and the German company’s net borrowing cost is 6.1% p.a. on €.  The swap dealer pays and receives $ at 5.2% p.a. (b) Suppose the US company has entered into a...
1. Assume you have just started working for a company that does not have an organizational...
1. Assume you have just started working for a company that does not have an organizational chart that shows reporting relationships. How would you go about determining to whom your boss reports and where your department fits in the overall organization structure? 2. Describe managerial skills and behaviors that would be required to manage effectively in a functional department. Are these skills and behaviors different from those required in a product department? Please explain. 3. For what type of an...
A US company has entered into an interest rate swap with a dealer in which the...
A US company has entered into an interest rate swap with a dealer in which the notional principal is $50 million. The company will pay a floating rate of LIBOR and receive a fixed rate of 5.75%. Interest is paid semi-annually, and the current LIBOR=5.15%. What is the total amount that the asset manager will pay to (or receive from) the dealer EVERY half of the year? Assume that every year we have 360 days, and each semi-annual payment is...
Walmart Corp. enters into a currency swap with a dealer in which it pays a fixed...
Walmart Corp. enters into a currency swap with a dealer in which it pays a fixed rate in euros, and the dealer pays a fixed rate in U.S. dollars. The notional principals are $385 million and €350 million (equivalent in value at the current exchange rate of $1.1 per euro.) The fixed rates are 4.8% in dollars and 5.2% in euros. Payments are made semiannually on the basis of 180/360. Semiannually: Question 17 options: Walmart makes interest payment of €18.2...
Assume you have $1 million now, and you have just retired from your job. You expect...
Assume you have $1 million now, and you have just retired from your job. You expect to live for 20 years, and you want to have the same level of consumption (i.e., purchasing power) for each of these 20 years, after adjusting for inflation. You also wish to leave the purchasing power equivalent of $100,000 today to your kids at the end of the 20 years as a bequest (or to pay them to take care of you). You expect...
A portfolio manager entered a swap with a dealer. The swap's notional principal is $100, payments...
A portfolio manager entered a swap with a dealer. The swap's notional principal is $100, payments are to be made semi-annually, and the swap allows netting of payments. The dealer agrees to pay a fixed annual rate of 4%, while the asset manager agrees to pay the return on SP500 index. The SP500 index at the initiation is 200. If SP500 six months later becomes 135, how much would be the payment from the dealer to the asset manager should...
1.Assume you have just arranged a loan from your bank in the amount of $10,000. The...
1.Assume you have just arranged a loan from your bank in the amount of $10,000. The bank will allow you to repay the loan with a lump sum payment of $11,500 in two years. No other payments will be made during this period. What is the implied EAR of this lending arrangement? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be...
Assume that you are the manager of a shop that assembles power tools. You have just...
Assume that you are the manager of a shop that assembles power tools. You have just received an order for 50 chain saws, which are to be shipped at the start of week 8. Pertinent information on the saws is Item Lead Time (weeks) On Hand Components Saw 2 15 A(2), B(1), C(4) A 1 10 E(3), D(1) B 2 5 D(2), F(3) C 2 65 E(2), D(2) D 1 20 E 1 10 F 2 30 b. Develop the...
For purposes of this discussion, you will assume that you have just been hired by Josephine,...
For purposes of this discussion, you will assume that you have just been hired by Josephine, a business which connects home-based food vendors to community members seeking home-cooked meals, similarly to the manner in which Über connects drivers to people needing a ride, and Etsy connects buyers to home-based crafts manufacturers. You are new to Josephine, and have been hired as finance manager. You are responsible for Josephine’s initial public offering, and in your capacity as finance manager, you wish...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT