Swaps The cost to IBM and KDB of accessing either fixed rate yen or the floating
ID: 2772608 • Letter: S
Question
Swaps
The cost to IBM and KDB of accessing either 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 IBM would like to borrow fixed rate yen, whereas KDB would like to borrow floating rate dollars.
Identify the overall spread (basis point) of the swap and at what rate should each party borrow to create the swap? IBM has comparative advantage in which rate?
CompanyFixed rate Yen Available
Floating rate Dollar Available
KDB 4.9%Libor + 0.80%
IBM 4.5%Libor + 0.25%
Explanation / Answer
Solution :
Company
Fixed rate Yen Available
Floating rate Dollar Available
KDB
4.90%
Libor + 0.80%
IBM
4.50%
Libor + 0.25%
difference
0.40%
0.55%
overall spread (basis point) of the swap = (.55 - .40) =0.15
Companies can achieve a combined 15 basis point savings if IBM borrowing floating-rate dollars at LIBOR + 0.25% and KDB borrowing fixed-rate yen at 4.9% and then swapping the proceeds. IBM would be able to borrow fixed-rate yen at 4.35% if all these savings were passed along to it in the swap. This could be accomplished by IBM providing KDB with floating-rate dollars at LIBOR + 0.25%, saving KDB 0.55%, which then passed these savings along to IBM by swapping the fixed-rate yen at 4.9% - 0.55% = 4.35%. Thus, the potential savings to IBM range from 0 to 0.15%.
Company
Fixed rate Yen Available
Floating rate Dollar Available
KDB
4.90%
Libor + 0.80%
IBM
4.50%
Libor + 0.25%
difference
0.40%
0.55%
overall spread (basis point) of the swap = (.55 - .40) =0.15
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