The 1-year LIBOR rate is 10% with annual compounding
Subject: Business / Finance
Question
1) The 1-year LIBOR rate is 10% with annual compounding. A bank trades swaps where a fixed rate of interest is exchanged for 12-month LIBOR with payments being exchanged annually. The 2- and 3-year swap rates (expressed with annual compounding) are 11% and 12% per annum. Estimate the 2- and 3-year LIBOR zero rates.
2)Company A, a British manufacturer, wishes to borrow US dollars at a fixed rate of interest. Company B, a US multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects):
Sterling US dollars Swap
Company A 11.0% 7.0% 4.0%
Company B 10.6% 6.2% 4.4%
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Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of 15 basis points per annum for each of the two companies.
