Evaluación de peces

(a) Manling loan interest rate: 12% Swap: Manling pays: LIBOR + 11

2%

Manling receives: 115 8%

Net interest rate paid by Manling after the swap: LIBOR + 11

2% + 12%

– 115

8% = LIBOR + 178%

(i) LIBOR remains at 10%

Without swap: interest rate paid = 12% With swap: interest rate paid = 10% + 17

8% = 1178%

Interest saving from swap:

1

8% on £14mn loan = £ 17 500

Less Bank fee = £(20 000) Net cost = £( 2 500)

Net cost of swap after tax relief:

£(2 500) × (1 – 0.35) = £(1 625)

Therefore in this LIBOR scenario, the swap would not be worthwhile. (ii) LIBOR falls to 9% after six months

Without swap: interest rate paid = 12% With swap: interest rate paid =10 1

9 1 11 7 8 7 8 3 8 % % % % % +  +  _= 0.5 0.5

Interest saving from swap:

5

8% on £14mn loan = £87 500

Less Bank fee = £(20 000) Net saving = £ 67 500

Net saving from swap after tax relief:

£67 500 × (1 – 0.35) = £43 875

C H A P T E R 1 4 I N T E R E S T R A T E R I S K 7 3 5

problem

Chapter 14

Interest rate risk

problem

Therefore, in this LIBOR scenario, the swap is worthwhile.

(b) Fixed interest Floating rate

loan loan Manling 12% LIBOR + 2% Swap partner 113 4% LIBOR + 118% Interest differentials 1 4% ⫽ 78%

As the interest differentials between the two types of loan are not the same, there is a benefit to be gained from a swap agreement equal, in total, to the difference between the two interest differentials:

7

8% –14% =58% interest saving

Given that this benefit is to be equally shared, each company will gain an interest saving of5

8% ÷ 2 =516%.

The swap arrangement is put together as follows: 1. Greatest interest differential: floating rate loan.

2. The ‘swap partner’ can raise this type of loan most cheaply: LIBOR + 11 8%.

3. Therefore the swap partner borrows £14mn at LIBOR + 11

8% and Manling keeps its

existing loan at a fixed interest rate of 12%.

4. Manling wants a floating rate loan and we know that through a swap, such a loan can be arranged at a5

16% interest saving on the normal interest rate that Manling would pay

for that type of loan: LIBOR + 2% –5

16% = LIBOR + 11116%.

5. Manling therefore pays LIBOR + 111

16% interest to the swap partner and, in

exchange, receives a fixed 12% interest rate from the swap partner (which can then be used to pay the interest on their fixed rate loan).

6. The swap partner therefore:

(i) Pays interest on its own loan : LIBOR + 11 8%

(ii) Receives from Manling : LIBOR + 111 16%

Gain from swap : 9

16%

(iii) Pays Manling : 12%

Net interest cost : 117 16%

Therefore, like Manling, the swap partner ends up with a loan at a5

16% interest saving

on the normal interest rate paid: Swap partner:

Normal fixed interest loan rate : 113 4%

Effective swap interest rate : 117 16%

Interest saving : 5

16%

Now, if LIBOR remains at 10%:

Manling Interest

With swap: £14mn × (10% = 111

16%) = £1 636 250

Without swap: £14mn × 12% = £1 680 000

Interest saving £ 43 750

Less bank fee £ (20 000)

Net interest saving £23 750

Swap partner Interest With swap: £14mn × 117 16% = £1 601 250 Without swap: £14mn × (10% = 11 8%) = £1 557 500 Interest cost £ (43 750)

Plus bank fee £ (20 000)

Total cost £ (63 750)

Net interest cost after tax relief: £(63 750) × 0.65 = £(41 438)

Therefore, with the benefit of hindsight, although the swap deal results in a gain for Manling, it results in a loss for the swap partner.

problem

(a) Omniown faces interest rate risk: the risk of an adverse movement in interest rates over the next three months. All three techniques will help hedge their exposure, but in different ways.

A forward rate agreement can be used to lock the company into a specific rate of interest, say 14%, so that whatever happens to interest rates over the next three months, Omniown will not be affected.

An FRA agreement works on the basis that the company pays the market rate of interest on its loan but, if that rate is above the agreed 14%, then they receive ‘compen- sation’ to bring their net effective interest rate down to the agreed 14%. Conversely, if market interest rates fall then they will have to pay compensation to bring their interest costs up to an effective 14%.

Interest rate futures have the same hedging effect as an FRA in that they hedge the company against both a rise and a fall in interest rates. However, unlike an FRA, futures are not tailor-made to the company’s precise requirements but are standardized con- tracts and so may not provide a perfect hedge effect.

A futures hedge works by ensuring that whatever happens to interest rates, there will be an offsetting effect from the futures contracts. Thus, for example, if interest rates rise over the next three months, Omniown will make an offsetting profit on their futures market contracts and vice versa.

In contrast to the first two hedging techniques, interest rate guarantees only hedge the company against a rise in interest rates, but allow the company to take advantage of a fall in rates. In other words, interest rate guarantees work as an option which the company exercises if rates rise, to enable the company to borrow at 14%. On the other hand, if rates fall, the company allows its option to lapse as it can borrow more cheaply at the open market rate. The only problem with interest rate guarantees is that this advantage that they have over forward rate agreements and futures means that they are a signifi- cantly more expensive hedging device.

(b) Value of a tick: £500 000 ×3

12× 0.0001 = £12.50

Target interest charge: £5mn ×6

12× 0.14 = £350 000 Hedge:

As the company wishes to hedge against the risk of a rise in interest rates, it needs to sell futures and then, in March, to ‘close out’ its futures position it will reverse the effects of this initial deal by buying futures.

Number of contracts involved: £5mn

£500 000= 10 contracts

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But to allow for the ‘maturity mismatch’ – three month futures used to hedge a six-month loan – the number of contracts involved will have to be doubled: 10 × 2 = 20 contracts.

Therefore Omniown will sell 20 futures contracts at 86.25.

(i) Interest rates rise to 16% and, it is assumed, the futures price falls by 2% to

84.25