Two clients of Barclays bank are offered the following fixed and floating rates for their borrowing per annum on a nominal denomination of £100 Million.
Fixed Rate (for 5 years) Floating rate
Client A 7% LIBOR Plus 0.5%
Client B 11% Libor Plus 0.9%
You are required to:
i. Design a swap agreement that will enable client A to pay a floating rate and client B to pay a fixed rate and is beneficial for both parties. The bank fee for arranging this deal is 10 basis point and assume the agreement is designed simultaneously. 10 Marks
ii. How does a forward contract for currency exchange differs from swap agreement of currency exchange? 05 Marks
iii. Swap agreements are said to be motivated by comparative advantages enjoyed by parties to an agreement. Discuss the key factors which cause these comparative advantages. 05 Marks
iv. Explain the risk of swap deals (interest rate and currency swaps) to an intermediary and how can they hedge against it. 05 Marks
