CMA Final · Strategic Financial Management · Swaps
Rohan Ltd and Sundaram Ltd can borrow as follows. Fixed: Rohan 9%, Sundaram 11%. Floating: Rohan MIBOR + 0.5%, Sundaram MIBOR + 1.5%. Rohan wants floating and Sundaram wants fixed. If they swap and share the total quality-spread gain equally (no intermediary), what is the total gain from the swap?
The total gain is 1.0% per annum. The difference in fixed borrowing rates is 2% while the difference in floating spreads is 1%, so the net comparative advantage to be shared is 1%, giving 0.5% to each party if split equally.
- A1.0% per annumCorrect
- B2.0% per annum
- C0.5% per annum
- D3.0% per annum
Explanation
Fixed differential = 11% - 9% = 2%. Floating differential = 1.5% - 0.5% = 1%. Net quality spread = 2% - 1% = 1%. Each party gains 0.5% if shared equally. A 2% answer uses only the fixed differential.
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