1.

Swap for borrowing

You work at the interest rate swaps desk of the treasury division of Dream Bank. Two firms have
approached the bank each seeking to enter into a $2 million intermediated interest swap. You
have ascertained the following information in relation to the borrowing capacity of each firm:

Debt markets Firm A Firm B

Fixed - rate funds 10.25% 8.75%
Floating – rate funds BBSW + 2.5% BBSW + 1.6%

Construct a swap that will benefit all parties based on the following conditions:
• The bank will acquire a fee of 0.1% per cent.
• The beneficial gains will be allocated 40% to firm A and 60% to firm B.

Show your offer to the firms. Use a fully labeled diagrammatic representation to present the
construction and cash flows of the intermediated swap. (In your answer should show:
comparative advantages, circumstance that firm wish to enter into swap; gains for each firms;
result after swap….)

2. Firm X and Y want to construct a swap and have approached the bank to enter into a $10
million intermediated interest rate swap. The data below show the rate at which firms X
and Y are able to invest in the fixed and floating- rate debt markets:

Debt markets Firm X Firm Y

Fixed - rate funds 7% 7.5%
Floating – rate funds BBSW + 1% BBSW + 0.5%

Construct a swap that will benefit all parties based on the following conditions:
• Bank will acquire a fee of 0.2% per cent.
• The beneficial gains will be allocated 40% to firm X and 60% to firm Y.

Show your offer to the firms. Use a fully labeled diagrammatic representation to present the
construction and cash flows of the intermediated swap. (In your answer should show:
comparative advantages, circumstance that firm wish to enter into swap; gains for each firms;
result after swap….)
Notice: many possible ways to construct a swap rate; for your own creative way (using
adjusted numbers: get 100% marks; for guided way (based on given numbers): get 80%
marks)