【正文】 waps Cash Flows Counterparty Asset Liability Hedging With Interest Rate Swaps Bank 71 Derivatives Swap 13: Basis Swap Swaps Cash Flows 6 month LIBOR 3 month LIBOR 6 month LIBOR 3 month LIBOR Counterparty Counterparty Bank Counterparty 72 Derivatives Arbitrage Against Cash Instruments Swap 15: Liability Arbitrage Swaps Arbitrage LIBOR % % Bank Counterparty Bond Liability 73 Derivatives Why Swap Arbitrage Occurs Swap arbitrage can occur for several reasons: ?Swaps linked to an index of average borrowing costs ?Subsidized financing ?Speed at which new information is incorporated into prices ?Supply and demand imbalances ?Credit or new issue arbitrage 74 Derivatives Currency Swaps ?similar to interest rate swaps (involve an exchange of interest rate flows) ?add two additional ponents ?interest rate flows are paid in different currencies ?exchange of principal at the maturity date of the swap 75 Derivatives Currency Swaps Sterling interest flows Dollar interest flows Sterling principal flow Dollar principal flow Company B Company A 76 Derivatives Hedging an Existing Currency Exposure ? Company A from UK issued a bond denominated in dollars, exposing it to exchange risk. ? To eliminate the exchange risk on dollar bond, it enters into a currency swap with Co. B whereby it receives interest denominated in dollars and pays interest denominated in sterling. ? At the maturity date of the swap, Co. A will pay Co. B sterling and receive dollars (at the exchange rate fixed at the swap initiation date), which it will use to redeem the bond. 77 Derivatives Sample Swaps Question ? As a bank manager, you are faced with the following problem. Company A can borrow fixed rate at % and floating rate at LIBOR + 25 basis points. Company B can borrow fixed rate at % and floating rate at LIBOR + 50 basis points. Company A wants to have floating rate debt and Company B wants to have fixed rate debt. They have approached you, the bank manager, to see if you could help them to attain their desired types of debt at a lower cost than if they were to fund directly in the market. If you do so, you would like to make 5 basis points yourself. What would you do? Assume that you will split any benefit equally between A and B (after you get your 5 basis points) 78 Derivatives Solution to Swaps Question ?Calculate the total benefit, which is equal to the difference in the fixed rate market minus the difference in the floating rate market. ?Fixed rate market % % = % ?Floating rate market L+ .50% L+ .25% = .25% ?Net Benefit .75% ?Deduct fee to the banker .05% ?Benefit to be split between A B .70% ?Benefit to A (%)(.50) = 35 bp ?Benefit to B (%)(.50) = 35 bp 79 Derivatives Company A Bank Company B Fixed 8% LIBOR + .50% LIBOR LIBOR Fixed 1 Fixed 2 To calculate Fixed 1: First, refer to how much Company A would have to pay if it borrowed floating rate money directly in the market. Then deduct the benefit due to A under the swap. This is A?s ?all in cost? of financing. This is equal to the sum of: LIBOR (paid by A under the floating leg of the swap) plus the spread in the fixed leg of the swap. Solution to Swaps Question 80 Derivatives Solution to Swaps Question ?On the preceeding page, we solved for the fixed payment received by Company A (Fixed 1). ?There is an alternative way to solve the swaps problem using a simple relationship to solve for the fixed payment made by Company B (Fixed 2). It is: Net LIBOR cost to B (LIBOR out LIBOR in) + X (the unknown fixed payment made by Company B) = Fixed rate if B borrowed directly in the market B’s proportinate benefit under the swap. Solve for X. 81 Derivatives Sample Swaps Question You are faced with the following situation. Company Fixed Rate Floating Rate ABC Company % LIBOR + 1/8% XYZ Company % LIBOR + 3/8% Questions: ? What is the total benefit to doing a swap? ? Which pany has the parative advantage in the floating rate market ? Construct a swap whereby the banker gets 10 basis points and the remaining benefit is split 75% to ABC and 25% to XYZ. 82 Derivatives Solution to Swaps Question ?Calculate the total benefit, which is equal to the difference in the fixed rate market minus the difference in the floating rate market. ?Fixed rate market % % = % ?Floating rate market L+3/8% L+1/8% = .25% ?Net Benefit % ?Deduct fee to the banker .10% ?Benefit to be split between ABC XYZ % ?Benefit to ABC (%)(.75) = 75 bp ?Benefit to XYZ (%)(.25) = 25 bp 83 Derivatives ABC Bank XYZ Fixed 8% LIBOR + 3/8% LIBOR LIBOR Fixed 1 Fixed 2 To calculate Fixed A: First, refer to how much ABC would have to pay if it borrowed floating rate money directly in the market. Then deduct the benefit due to ABC under the swap. This is ABC?s ?all in? cost of financing. This is equal to the sum of: LIBOR (paid by ABC under the floating leg of the swap) plus the spread in the fixed leg of the swap. Solution to Swaps Question 84 Derivatives Solution to Swaps Question ?On the preceeding page, we solved for the fixed payment received by ABC (Fixed 1) ?There is an alternative way to solve the swaps problem using a simple relationship to solve for the fixed payment made by XYZ (Fixed 2). It is: Net LIBOR cost to XYZ (LIBOR out LIBOR in) + X (the unknown fixed payment made by XYZ) = Fixed rate if XYZ borrowed directly in the market XYZ’s proportinate benefit under the swap. Solve for X. 85 Derivatives Sample Option Problems ? You are a call buyer facing the following: Call premium $ Exercise price $ Stock’s market price at expi