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Structured Interest rate Swap4.1 Your allocated company is currently considering a proposal from an Investment Bank to decrease their cost of funding by entering into a structured interest rate swap....

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Structured Interest rate Swap4.1 Your allocated company is currently considering a proposal from an Investment Bank to decrease their cost of funding by entering into a structured interest rate swap. Details of theswap and the cover letter from the investment bank have been supplied individually to eachgroup.You need to address the following questions as part of your analysis:
· Demonstrate your understanding of the structured swap by discussing the characteristics of the swap in your own words.
· Analyse the cash flows of the swap discussed in the investment bank proposal.
· Estimate the net cost of borrowing, if the swap was to proceed, for the debt and the swap referred to in the investment bank proposal.
· Using the data supplied regarding historical interest rate yields, perform a quantitative analysis using appropriate risk control techniques to assess the risk embedded in the structure.
· Discuss whether your allocated company should proceed with the proposal.
005_lalva5o-jamp523r.xls 005_ckpva5o-fxoy5hhz.docx
Answered Same Day Dec 27, 2021

Solution

Robert answered on Dec 27 2021
127 Votes
Part 1
Swap is an OVER THE COUNTER agreement between two companies to exchange cash
flow in future .Swaps were introduced in 1980s but plays significant role in derivatives
market.
Cu
ency swaps are bilateral agreements to exchange future cash flows in different
cu
encies. Cu
ency swaps were introduced to make bo
owing efficient in capital markets
.It is used to convert debt denominated in one cu
ency into synthetic debt denominated in
other cu
ency. In cu
ency swaps we need specify principal amount because of different
exchange rates
Cu
ency swaps can be have either fixed to fixed rate or floating to fixed rate. In fixed to
fixed rate cu
ency swaps both the trading parties pay predetermined fixed interest rate cash
flows on principal amount while in fixed to floating rate one party pays fixed interest rate
cash flow and cash flow paid by other company varies according to LIBOR (London Inter-
Bank Offered rate)
Part 2
Cu
ency Swaps find its very use full application due to comparative advantage of firm in
aising capital in its own...
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