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Chapter 7

# Options, Futures, and Other Derivatives with Derivagem CD (7th Edition)

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Chapter 7 Homework Solution 1. Co. A has CA in fixed Co. B has CA in floating Borrow where the CA is and swap Gains-to-Trade = 90 bps: 10 for the bank and 40 for each company Co. A should net LIBOR – 0.3% Co. B should net 6.0% Co. B: (LIBOR + 0.6%) - LIBOR + 5.4% = 6.0% Co. A: 5.0% - 5.3% + LIBOR = LIBOR – 0.3% 2. Co. X has CA in yen Co. Y has CA in dollars Borrow where the CA is and swap Gains-to-Trade = 110 bps: 50 for the bank and 30 for each company Co. X should net 9.3%\$ Co. Y should net 6.2%¥ Co. X: 5.0%¥ - 5.0%¥ + 9.3%\$ = 9.3%\$ Co. Y: 10.0%\$ - 10.0%\$ + 6.2%¥ = 6.2%¥ Bank: 5.0%¥ - 9.3%\$ + 10.0%\$ - 6.2%¥ = -1.2%¥ + 0.7%\$ = -0.5% (Since positive numbers indicate payments, the bank is receiving 50 bps.) 9. Note: Investment implies cash inflows Co. X has CA in floating Co. Y has CA in fixed Borrow where the CA is and swap Gains-to-Trade = 80 bps: 20 for the bank and 30 for each company Co. X should net 8.3% Co. Y should net LIBOR + 0.3% Co. X: LIBOR – LIBOR + 8.3% = 8.3% Co. Y: 8.8% - 8.5% + LIBOR = LIBOR + 0.3%

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Unformatted text preview: 11. Co. A has CA in fixed C\$ Co. B has CA in floating US\$ Borrow where the CA is and swap Gains-to-Trade = 100 bps: 50 for the bank and 25 for each company Co. A should net LIBOR +0.25%US\$ Co. B should net 6.25%C\$ Co. B: LIBOR + 1.0%US\$ - (LIBOR + 1.0%US\$) + 6.25%C\$ = 6.25%C\$ Co. A: 5.0%C\$ - 5.0%C\$ + (LIBOR + 0.25%US\$) = LIBOR + 0.25%US\$ Bank: (LIBOR + 1.0%US\$) - 6.25%C\$ + 5.0%C\$ - (LIBOR + 0.25%US\$) = -1.25%C\$ + (LIBOR + 0.75%US\$) = -0.5% (Since positive numbers indicate payments, the bank is receiving 50 bps.) 20. Co. A has CA in pounds Co. B has CA in dollars Borrow where the CA is and swap Gains-to-Trade = 40 bps: 10 for the bank and 15 for each company Co. A should net 6.85%\$ Co. B should net 10.45%£ Co. A: 11.0%£ - 11.0%£ + 6.85%\$ = 6.85%\$ Co. B: 6.2%\$ - 6.2%\$ + 10.45%£ = 10.45%£ Bank: 11.0%£ - 6.85%\$ + 6.2%\$ - 10.45%£ = 0.55%£ - 0.65%\$ = -0.1% (Since positive numbers indicate payments, the bank is receiving 10 bps.)...
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