week5 activities solutions - Activity Discussion on SWAP A...

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Activity: Discussion on SWAP A bank finds that its assets are not matched with its liabilities. It is taking floating-rate deposits and making fixed-rate loans. How can swaps be used to offset the risk? This bank is paying a floating-rate on the deposits and receiving a fixed-rate on the loans. It can offset its risk by entering into interest rate swaps (with other financial institutions or corporations) in which it contracts to pay fixed and receive floating.
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The Comparative Advantage The Comparative Advantage Argument-Activity Argument-Activity BP wants floating rate to pay its future payment at LIBOR +0.75%, but XYZ wants fixed rate to pay its future payment at 10%. How to design a swap that will net a bank, acting as intermediary with the fee 0.2% per annum and will appear equally attractive to BP and XYZ? BP has a greater advantage in the fixed rate market XYZ raise funds in floating rate market (with less advantages) for transferring its fixed liability
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This note was uploaded on 04/21/2011 for the course BUSINESS AAF001-1 taught by Professor Dr.tony during the Spring '11 term at University of Bedfordshire.

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week5 activities solutions - Activity Discussion on SWAP A...

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