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FRM Part I · FRM Exam Part I · Swaps

Company A can borrow fixed at 6.0% or floating at SOFR + 0.50%. Company B can borrow fixed at 7.5% or floating at SOFR + 1.50%. They enter a swap through no intermediary, sharing the total quality spread differential equally. A wants floating and B wants fixed. What is the total gain from the swap, and the gain to each party?

The total gain is 0.50%, or 0.25% each. The fixed-rate spread between B and A is 1.50% while the floating-rate spread is 1.00%. The difference of 0.50% is the comparative advantage benefit, shared equally between the two companies.

  1. ATotal 0.50%; 0.25% eachCorrect
  2. BTotal 1.00%; 0.50% each
  3. CTotal 0.50%; 0.50% each
  4. DTotal 1.50%; 0.75% each

Explanation

Fixed spread differential = 7.5% - 6.0% = 1.50%. Floating differential = 1.50% - 0.50% = 1.00%. Total gain = 1.50% - 1.00% = 0.50%, split equally gives 0.25% each. Using 1.00% confuses the floating differential with the gain.

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