In Nov 2007 when £1.00 = $2.00, conditions in the four year market indicated that currency swap banks were prepared to p

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In Nov 2007 When 1 00 2 00 Conditions In The Four Year Market Indicated That Currency Swap Banks Were Prepared To P 1 (151.66 KiB) Viewed 59 times

In Nov 2007 when £1.00 = $2.00, conditions in the four year market indicated that currency swap banks were prepared to pay or receive fixed dollars at 4% of dollar face values against receiving or paying 5% of the face value equivalent in pounds. These mid market rates are for annual rates and single annual payments in arrears. Both term structures are flat and not expected to change. Mid market currency swap rates Years Swap Yld p.a. PV Swap Con PMT p.a. FV 4.0% $200M $8.00M $200M $200M par currency swap £100M par currency swap 4 5.0% -£100M £5.00M £100M a) Considering the swap quotes above as a mid or choice price (zero profit) rates, show a table with the annual flows on each leg of the currency swap above Now you discover that in Nov 2007 your firm, Bank Inc, intermediated between back to back annual currency swaps with two other firms Def plc (UK) and Dis inc (US). These are shown diagrammatically below for the four year bond borrowings and currency swaps. $200M fixed $ p.a. 3.90% fixed $ p.a. 3.90% fixed $p.a. 4.10% <- US Bond market Def plc Bank Dis Inc UK Bond market -> 5.10% fixed £ p.a. 4.90% fixed £p.a. 4.90% fixed £p.a. £100M b) Using the concept of comparative advantage, explain why Def plc may have wished to switch from net external financing fixed in £ to that fixed in $ and why Dis inc. may have borrowed in the UK pound market but switched to dollars.