Swaps The cost to IBM and KDB of accessing either the fixed rate yen or the floa

Question

Swaps

The cost to IBM and KDB of accessing either the fixed rate yen or the floating rate dollar market for a new debt issue is as follows:

Fixed rate Yen Available

Floating rate Dollar Available

Libor + 0.80%

Libor + 0.25%

Suppose that IBM would like to borrow fixed rate yen, whereas KDB would like to borrow floating rate dollars. Answer part (a), (b) (c) and (d) below:

Identify the overall spread (basis point) of the swap and at what rate should each party borrow to create the swap? IMB has competitive advantage in which rate?

What is the fixed rate Yen at which IBM can borrow through interest rate/currency swap if KBD can borrow at floating rate of Libor+0.25%?

(c)   Assuming a notional principle equivalent to $125 million and a current exchange rate of Yen105/$, what do these possible cost savings translate into in Yen terms?

(d)  Assuming that Bank of American is the intermediary and charges a fee of 8 basis points to arrange the swap. If IBM realises all the saving from the swap then what is IBM borrowing cost and what is the cost savings translate into Yen terms?

Fixed rate Yen Available

Floating rate Dollar Available

Libor + 0.80%

Libor + 0.25%

Explanation / Answer

under interest rate swap , One company meets the floating interest rate of another company and in return later company meets the fixed rate requirement of first company.

a)If interest rate is not used:

Then total interest cost = KDB =LIBOR+.80%

                                      IBM =4.5%

Total cost = LIBOR +5.30%

If interest rate swap is used:

KDB =4.9%

IBM =LIBOR + .25%

TOtal interest cost = LIBOR + 5.15%

spread(savings) = Cost if swap is not used-cost if swap is used

              = LIBOR + 5.30%- LIBOR -5.15%

           = .15%

The KDB should borrow at fixed rate of 4.9% and IBM should borrow at Floating rate of LIBOR +5.15%

IBM Will have a competitve advantage if it borrow at LIBOR +5.15% And give to KDM and borrow from KDM at fixed rate of 4.90%

B)IBM can borrow at a fixed rate of 4.90%

c)If 1$ = 105 yen , then $ 120 is equal to 105*120

                                            = yen 13,125

so net savings in yen terms = 13125 * .15 %(as calculated above a)

                                          = yen 19.6875

D) If there is a borrowing cost = .08%(1 Basis point is equal to .01% so 8 basis point = .08%)

Net savings = savings - borrowing cost

                 = .15% - .08%

                   = .07%

This net savings is to be distributed between KDM AND IBM in ratio of 1:1

So IBM Net borrowing cost =4.90% - (.07/2)

                                          = 4.865%

cost savings translate in to yen terms = 13125*.07%

                                                     = yen 9.1875

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.