1、Currency & Interest RateCurrency & Interest Rate SwapsThis chapter discusses currency and interest rate swaps, which are relatively new instruments for hedging long-term interest rate risk and foreign exchange risk. The swap bank makes this offer to Bank A: You pay LIBOR 1/8 % per year on $10 millio
2、n for 5 years and we will pay you 10 3/8% on $10 million for 5 years COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR Swap BankLIBOR 1/8%10 3/8%Bank A Heres whats in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing position of -10 3/8 + 10 + (LIBO
3、R 1/8) = LIBOR % which is % better than they can borrow floating without a swap.10% of $10,000,000 = $50,000. Thats quite a cost savings per year for 5 years.Swap BankLIBOR 1/8%10 3/8%Bank A COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR The swap bank makes this offer to comp
4、any B: You pay us 10% per year on $10 million for 5 years and we will pay you LIBOR % per year on $10 million for 5 years. COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR Company BSwap Bank10 %LIBOR %They can borrow externally at LIBOR + % and have a net borrowing position of
5、10 + (LIBOR + ) - (LIBOR - ) = 11.25% which is % better than they can borrow floating. COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR LIBOR + % % of $10,000,000 = $50,000 thats quite a cost savings per year for 5 years.Swap BankCompany B10 %LIBOR %The swap bank makes money to
6、o.LIBOR 1/8 LIBOR = 1/8 10 - 10 3/8 = 1/8 Swap BankCompany B10 %LIBOR %LIBOR 1/8%10 3/8%Bank A COMPANY B BANK A Fixed rate 11.75% 10% Floating rate LIBOR + .5% LIBOR The swap bank makes %Swap BankCompany B10 %LIBOR %LIBOR 1/8%10 3/8%Bank AB saves %A saves % COMPANY B BANK A Fixed rate 11.75% 10% Flo
7、ating rate LIBOR + .5% LIBOR $ Com pany A 8.0% 11.6% Com pany B 10.0% 12.0% $9.4%Firm B$8%12%Swap BankFirm A11%$8% 12% $ Company A 8.0% 11.6% Company B 10.0% 12.0% $8%12%Firm BSwap BankFirm A11%$8%$9.4% 12%A saves .6% $ Com pany A 8.0% 11.6% Com pany B 10.0% 12.0% As net position is to borrow at 11%
8、$8%Firm BSwap BankFirm A11%$8%$9.4% 12%Bs net position is to borrow at $9.4%B saves $.6% $ Company A 8.0% 11.6% Company B 10.0% 12.0% $8%12%Firm BThe swap bank makes money too:At S0($/) = $1.60/, that is a gain of $124,000 per year for 5 years.Swap BankFirm A11%$8%$9.4% 12%1.4% of $16 million financ
9、ed with 1% of 10 million per year for 5 years.The swap bank faces exchange rate risk, but maybe they can lay it off (in another swap). $ Company A 8.0% 11.6% Company B 10.0% 12.0% A has a comparative advantage in borrowing in dollars.B has a comparative advantage in borrowing in pounds. $ C om pany A 8.0% 11.6% C om pany B 10.0% 12.0% A pays 2% less to borrow in dollars than BA pays .4% less to borrow in pounds than B:B pays 2% more to borrow in dollars than A $ C o m p a n y A 8 .0 % 1 1 .6 % C o m p a n y B 1 0 .0 % 1 2 .0 % B pays only .4% more to borrow in pounds than A:
