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CMA Final · Strategic Financial Management · Swaps

Firm X can borrow fixed at 9% or floating at MIBOR + 1%. Firm Y can borrow fixed at 10.5% or floating at MIBOR + 1.25%. X wants floating and Y wants fixed. The total gain from a swap is shared equally, with no intermediary. What is the total saving available from the swap?

The total saving is 1.25% per annum. The difference in fixed-rate borrowing costs is 1.5% while the difference in floating costs is 0.25%; the gap of 1.25% is the gain available to be shared through the swap.

  1. A1.25% p.a.Correct
  2. B1.00% p.a.
  3. C0.25% p.a.
  4. D1.50% p.a.

Explanation

Quality spread in fixed = 10.5 - 9 = 1.5%. Quality spread in floating = 1.25 - 1 = 0.25%. Total gain = 1.5 - 0.25 = 1.25% p.a., so each gains 0.625%. 1.50% ignores the floating differential.

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