derivatives加拿大著名咨询公司在某银行的讲座课件

DerivativesLecture#51DerivativesDerivativesLecture#51DerivatiDerivativesDefinition:Aderivativesecurityisasecuritywhosemarketvalueisdeterminedbythevalueofanother,underlyingsecurityFunctionshedgingspeculationRisksinabilitytounderstandinabilitytoformaperfecthedgecost2DerivativesDerivativesDefinition:AderiDerivativeInstrumentsMarketsTradedorlistedmarketsOTCHedgingInstrumentsInsuranceInstruments3DerivativesDerivativeInstrumentsMarkets3HedgingInstrumentsForwardcontractsAcontractagreedupontotodaytodeliveraspecifiedgoodataspecifiedpriceataspecifiedfuturedateFuturescontractsAstandardized,exchange-tradedforwardcontractForwardRateAgreementsTakeaviewastofutureinterestratesSwapsAnexchangeofinterestand/orcurrencyflows

4DerivativesHedgingInstrumentsForwardconInsuranceContractsOptionContractsTheright,butnottheobligation,toeitherbuy(calloption)orsell(putoption)somethingataspecifiedpriceforaspecifiedperiodoftime.Floors,capsandcollarsMethodsofchangingtheinterestrateriskofafloatingratedebtobligationSwaptionsAnoptiontoenterintoaswapataspecifiedfuturedate5DerivativesInsuranceContractsOptionContForwardContractsMarketPriceDeliveryPrice+-0PayoffDiagram:LongtheForwardYoutakedeliverywhenlongtheforward.Thelongforwardpositionwillbenefitwhenmarketpricesriseafterthecontractisinitiated.6DerivativesForwardContractsMarketPriceForwardContractsMarketPriceDeliveryPrice+-0PayoffDiagram:ShorttheForwardYoumakedeliverywhenshorttheforward.Theshortforwardpositionwillbenefitwhenmarketpricesfallafterthecontractisinitiated.7DerivativesForwardContractsMarketPriceForwardMarkets&

Interest

RatesThemostliquidforwardmarketisthe“when-issued”TreasuryBillmarket.Dealersandinvestorsbuyandselltheas-yet-unissuedTreasuryBillfordeliveryimmediatelyaftertheyareissuedatauction.Theactivityinthe“when-issued”marketisagoodindicatorofwherethemarketbelievesratesareheaded8DerivativesForwardMarkets&

InterestRaHedgingInterestRateswithForwardContractsSupposeyouareholding$1,000,000insixyear,8%couponEurobondscurrentlytradingatpar.Youbelievethatinterestrateswillsoonriseby2%.Howdoyouhedgetheportfolio?Step#1:Calculatethebond’sdurationDuration=4.99271Step#2:PredictcapitallossP=(-D)(P)(R/1+R)=-$92,457Step#3:Adjustforconvexity(orcalculateactualpriceatnewmarketinterestrateof10%)Price=$912,894.79Actuallossthusequalto$1,000,000-912,894.79=$87,105.219DerivativesHedgingInterestRateswithFoHedgingInterestRateswithForwardContractsStep#4:HedgeSellthebondforwardforsaleinsixmonthsatapriceof$100per$100offacevalue.Ifinterestratesriseaspredicted,purchasethebondinthemarketfor$912,894.79anddeliverundertheforwardcontract.Collect$1,000,000.Profitontheforwardexactlyoffsetsthelossonthebondportfolio.Ifratesfallinsteadofrise,youwillincuraloss,asyouwillhavetodeliverthebondatapricebelowitsmarketprice.10DerivativesHedgingInterestRateswithFoComparingFutures&Forwards

Forward FutureStandardized No YesExchange-traded No YesMarked-to-market No YesProfits&lossessettleddaily No YesMarginrequired No YesExistenceofclearinghouse No Yes11DerivativesComparingFutures&Forwards ForwardRateAgreements Assumethat,asabankmanager,youarefacingthefollowingsituation:Sixmonthinterestratesare10.5%.Threemonthinterestratesare10%.Whatthreemonthinterestrate,threemonthsfromtoday,wouldmakeusindifferentbetweeninvestinginonesixmonthinstrumentortwo,threemonthinstruments?Howcouldthebankprofitfromthisinformation?12DerivativesForwardRateAgreements AssumeForwardRateAgreements10.5%10%X%ThreemonthsThreemonthsSixMonths13DerivativesForwardRateAgreements10.5%10ForwardRateAgreementsTosolvetheproblem,wemustsolvethefollowingequationfortheforwardinterestrate,rfwd/fwd:14DerivativesForwardRateAgreementsTosolvForwardRateAgreementsWhere:D-numberofdaysintheperiodB-AnnualbasisrLong-ThespotsixmonthinterestraterShort-Thespotthreemonthinterestraterfwd/fwd-

Thethreemonthforwardinterestrate15DerivativesForwardRateAgreementsWhere:1ForwardRateAgreementsSolvingtheproblem,weobtainthefollowingsolution:16DerivativesForwardRateAgreementsSolvingForwardRateAgreementsAtayieldof10.7342%onthreemonthmoneythreemonthsfromtoday,youwouldbeindifferentbetweeninvestinginonesixmonthinstrumentortwo,threemonthinstruments.Howcouldthebankmanagerprofitfromthisinformation?Ifthebankisabletoobtaintwo,threemonthdepositsatarateof10%andthenlendthemoneyat10.5%,thebankisassuredofmakingaprofitbasedonthemismatchinterm.17DerivativesForwardRateAgreementsAtayiForwardRateAgreementsBankschangetheirGAPwhentheyborrowandlendwithdifferentmaturities.NegativeGAPoccurswhenthebankborrowsshorttermandlendslongterm.Theriskisthatshortinterestrateswillrisebeforethelongassetmatures.Howwouldwecalculatetheprofitthebankwouldmakeifitcouldborrow$100,000,000at10%fortwo,threemonthperiodsandinvestthefundsat10.5%forsixmonths?18DerivativesForwardRateAgreementsBankscForwardRateAgreementsTosolvetheproblem,usethefollowingformula:19DerivativesForwardRateAgreementsTosolvForwardRateAgreementsProblemswithusingforward/forwardsCreditrisk-thebankincurscreditriskonthelendingtransactionCapitalcharges-thebankmustholdadditionalcapitalagainstitslargerbalancesheetLinesofcredit-thebankisusingupitscreditcapacitywiththeborrowingtransactionTransactioncosts-thebankincurscostsinbothborrowing&lendingPolicyconflicts-thebankistryingtoadjustitsinterestrateriskpositionanditsborrowingandlendingactivitieswithoneinstrument-theBalanceSheet20DerivativesForwardRateAgreementsProblemForwardRateAgreementsThesolutiontotheproblemistouseaForwardRateAgreementAforwardrateagreement(FRA)isidenticaltoaforwardcontractindeposits,exceptnodepositisevermade.FRAsallowbanks&corporatesto“bet”onfutureinterestrateswithoutaffectingthesizeoftheirbalancesheets.Ineffect,theFRAallowsthebankto“unbundle”thecreditriskcomponentfromtheinterestrateriskcomponent.21DerivativesForwardRateAgreementsThesolForwardRateAgreementsSomedefinitions:FRA-afinancialcontractwhichcommitsonepartytocompensatetheotherpartyiftheinterestratewhichactuallyprevailsinthemarketplaceatsomefuturedatediffersfromtherateagreeduponbetweenthemtoday.Counterparties-referredtoasbuyersorsellersFRABuyer-profitsifinterestratesriseFRASeller-profitsifinterestratesfallInterestRatesContractReferenceRate-theinterestratewhichisfixedatthestartoftheFRAcontractSettlementRate-themarketrateatthestartofthenotionaldeposit22DerivativesForwardRateAgreementsSomedeForwardRateAgreementsMoredefinitions:Netcompensationamount-theamountofmoneyrequiredtosettletheFRA.EqualtothedifferencebetweentheContractReferenceRateandtheSettlementRatemultipliedbytheNotionalPrincipalAmount,scaledbythetermoftheFRA.ContractPeriod-thetermofthenotionaldepositonwhichtheFRAisbased.FRAcontractsareusuallydescribedintermsoftheperiodstoSettlementandMaturity.AFRAona6monthnotionaldepositcommencinginthreemonthswouldbedescribedasa3’s,9’sor3against9andisusuallywrittenas3v9.23DerivativesForwardRateAgreementsMoredeForwardRateAgreementsTodayStartDateofNotionalDepositMaturitydateofNotionalDeposit03Months6MonthsExampleofa3by6FRAThenotionaldepositstarts3monthsfromtodayandmaturessixmonthsfromtoday.Sincenodepositisactuallymade,thepartywhichhas“lostthebet”willmakeapaymenttotheotherpartycalculatedasthedifferencebetweentherateagreedtointheFRAandthecurrentmarketratefortheagreedmaturityofdepositatthetimethenotionaldepositismade.PricingisusuallydoneagainsttheBArate(inCanada)orLIBOR.24DerivativesForwardRateAgreementsTodayStForwardRateAgreementsPotentialproblemswithFRAs:Insomejurisdictions,thecontractmaybeconstruedasagamblingcontract,creatingenforceabilityproblems.Thebestdefenseisgooddocumentation.DuetothetremendousleverageofFRAscomparedtofwd/fwds,thesizeofthebetsthatcanbeplaced,relativetothebank’sBalanceSheet,aremuchlarger.TheFRApayoffoccursatthestart,nottheend,ofthenotionaldepositperiod.Thiscanleadtocashflowproblems.25DerivativesForwardRateAgreementsPotentiOptionsMarketsOptionsarederivativesecuritieswhichallowaninvestorto......eitherlayoffrisk...ortoassumeadditionalrisk(toearnahigherreturn).Optionsalsoallowaninvestortoprofitfrom......eitheranincreaseordecreaseinthepriceofasecurity...ortoprofitwhenthepricedoesnotmoveatall.26DerivativesOptionsMarketsOptionsarederOptionsStraddleStripStrapPutsCalls1221OptionstobuyOptionstosellSpread27DerivativesOptionsStraddleStripStrapPutsCOptions

DefinitionsCallOption-Acalloptiongivesthebuyertherightbutnottheobligationtobuy

ataspecifiedpriceforaspecifiedperiodoftimePutOption-Aputoptiongivesthebuyertherightbutnottheobligationtosell

ataspecifiedpriceforaspecifiedperiodoftimeExercisePrice(StrikePrice)-Thepricepaid(orreceived)forthestockuponexercise.Expiration(Termination)Date-Thelastdateonwhichtheoptioncanbeexercised.AmericanOption-Isabletobeexercisedatanypointduringtheoption’slife.EuropeanOption-IsidenticaltoanAmericanOptionexcepttheoptioncanonlybeexercisedonit’sexpirydate.28DerivativesOptions

DefinitionsCallOptionHistoryofOptionTradingCalloptiontrading

intheUS.beganinApril,

1973

withthecreationoftheChicagoBoardOptionsExchangePutoptiontrading

wasintroducedin1977Canadiancalls&puts

startedtradingapproximatelyoneyearafterthoseintheUS29DerivativesHistoryofOptionTradingCallVariablesAffectingOptionPricesFactorswhichwillaffect

thepriceoftheoptioninclude:TimeperiodbeforeexpiryVariabilityofstockpricesRiskfreeinterestrateExercisepricevis-a-visstockprice30DerivativesVariablesAffectingOptionPriProfitGraph-CallBuyerProfitLoss0MarketPriceofCommonStockZExercisePriceNote:Maxlossisthepremiumbutprofitsareunlimited31DerivativesProfitGraph-CallBuyerProfiProfitGraph-CallWriterProfitLoss0MarketPriceofCommonStockZNote:MaxprofitisthepremiumbutlossesareunlimitedExercisePrice32DerivativesProfitGraph-CallWriterProfCommonStockasaCallOptionProfitLoss0MarketPriceofthefirm’sassets

Conclusion:commonstockofallleveraged,limitedliabilityfirmscanberegardedasacalloptiononthefirm’sassetswithanexercisepriceequaltothefaceamountofthefirm’sdebt.ExercisePriceEqualtoFaceAmountofDebt45%line33DerivativesCommonStockasaCallOptionPSomemoredefinitionsOutofmoneyAtthemarketInthemoneyDeepinthemoneyMaximumValueLineMinimumValueLine34DerivativesSomemoredefinitionsOutofmoSomemoredefinitions...8MaximumValueLineMonthsBeforeExpiryExercisePrice42OutoftheMoneyAttheMoneyIntheMoneyDeepintheMoneyMinimumValueLine35DerivativesSomemoredefinitions...8MaximProfitGraph-PutBuyerExercisePriceZMarketPrice0ProfitLossNote:MaxprofitachievedifpriceofC.S.fallstozero.Maximumlossisvalueofpremium.36DerivativesProfitGraph-PutBuyerExerciProfitGraph-PutWriterExercisePriceZMarketPrice0ProfitLossNote:MaximumlossissustainedifC.S.fallstozero.Maximumprofitisvalueofpremium.37DerivativesProfitGraph-PutWriterExercFactorsWhichDetermine

PutPremiumsTimebeforeexpirationPricevolatilityoftheoptionedsecurityRiskfreeinterestrateExerciseprice38DerivativesFactorsWhichDetermine

PutPExercisePriceMarketPriceofOptionedSecurity0ProfitLossStraddles(1Put+1Call)Premiumpaid=Premiumfor1Call+1Put39DerivativesExerciseMarketPriceofOptionExercisePriceMarketPriceofOptionedSecurity0ProfitLossStrips(2Puts+1Call)Premiumpaid=Premiumfor2Puts+1Call40DerivativesExerciseMarketPriceofOptionExercisePriceMarketPriceofOptionedSecurity0ProfitLossStraps(2Calls+1Put)41DerivativesExercisePriceMarketPriceofExercisePriceMarketPriceofOptionedSecurity0ProfitLossSpread(1Call+1Put)PutCallMarketPriceWhenOptionWrittenCBA42DerivativesExercisePriceMarketPriceofWritingOptions:

CoveredorNakedAnoptionwriterissaidtohavewrittenacoveredoptionwhentheyalsoowntheunderlyingoptionedsecurity.

Bywritingcoveredoptions,theoptionwriterreducestherisk

ofunfavorablepricemovements.43DerivativesWritingOptions:

CoveredorNExercisePriceMarketPriceofOptionedSecurity0ProfitLossProfitGraphCoveredCallWriterAbovetheexerciseprice,profit=premium.Belowtheexercisedprice,thelossonholdingthecommonlongispartiallyoffsetbythecallpremium.Premium44DerivativesExercisePriceMarketPriceofCaps,FloorsandCollarsCapsareO-T-CinterestrateoptionsofferedbyfinancialinstitutionstoprovideinsuranceagainstunexpectedincreasesininterestratesabovesomepredeterminedlevelThecapensuresthattheratepaidonafloatingrateliabilityistheloweroftheprevailingmarketrateorthecaprate

Example:Acorporatehasa$10milliondollarloanonwhichitpaysthreemonthLIBOR.Abankhasprovidedaninterestratecapof10%perannum.Attheendofeachquarter,thefinancialinstitutionsellingthecapwillpaytotheborrower:

0.25x10,000,000xmax.(R-0.1,0)

whereRisthe3monthLIBORrateatthebeginningofthequarter.45DerivativesCaps,FloorsandCollarsCapsaCaps,Floors&Collars(Con’t)AfloorsetsalowerlimitontheinterestratewhichwillbechargedAcollarisboththepurchaseofacapandthesaleoffloor,oftenatnocosttothecorporate46DerivativesCaps,Floors&Collars(Con’t)SwapsWhySwapsExistSizeofSwapsMarket47DerivativesSwapsWhySwapsExist47DerivatiWhySwapsExist...becausemarketsarenotperfect.Imperfectmarketsleadstofirmshavingcomparativeadvantagesindifferentmarkets.Ifeachfirmtransactsinthemarketwheretheyhaveacomparativeadvantage,anetbenefitwillbecreatedwhichcanbedividedbetweenthefirms.48DerivativesWhySwapsExist...becausemarkSizeofSwapsMarketTheuseofswapshasgrownexponentiallysincetheirfirstusein1981.Today,severaltrilliondollarsworthofthesecontractsareinexistence.

Forexample,Table1andTable2showthesize,respectively,oftheInterestRateSwaps

andCurrencySwapsMarket

asofDecember31,1995.49DerivativesSizeofSwapsMarketTheuseofTable#1

InterestRateSwapsSource:InternationalSwapsandDerivativesAssociationMarketSurvey,December31,199550DerivativesTable#1

InterestRateSwapsSoTable#2

CurrencySwapsSource:InternationalSwapsandDerivativesAssociationMarketSurvey,December31,199551DerivativesTable#2

CurrencySwapsSource:BenefitsofUsingSwapsLowercostoffundsManageinterestrateexposureProvideaccesstointernationalcapitalmarketsHedgecurrencyexposureExtendorshortendebtmaturitiesChangetheinterestrateorcurrencysensitivityofassetsManageassetsandliabilitiesLockinfuturefinancingcostsDeferormatchcashflows52DerivativesBenefitsofUsingSwapsLowercDefinitionAswapisanagreementbetweentwopartiestoexchangefuturestreamsofpayments.

Thetwobasictypesofswapsare:interestrateswapsandcurrencyswaps.53DerivativesDefinitionAswapisanagreemeAninterestrateswap

isanagreementtoexchangeastreamofinterestpaymentsbasedononeinterestratebasisorindexforastreamofinterestpaymentsbasedonasecondinterestratebasisorindex,butwithbothstreamscalculatedbasedonthesamenotionalprincipalamount.InterestRateSwaps54DerivativesAninterestrateswapisanagA

currencyswap

isanagreementtoexchange,overtime,aninterestflowdenominatedincurrencyAforaninterestflowdenominatedincurrencyB,withanexchangeofprincipalatthematuritydateoftheswap,withtheexchangeofprincipaldoneatafixedandpredeterminedexchangerate.CurrencySwaps55DerivativesAcurrencyswapisanagreemenTypesofSwaps56DerivativesTypesofSwaps56DerivativesSwapTerminology(1/2)Receiver ThecounterpartyreceivingthefixedinterestpaymentsPriceorswaprate Thefixedinterestratepaidundertheswap(alsoreferredtoastheall-inswapprice)Payer ThecounterpartymakingthefixedinterestpaymentsSwapspread Thedifferencebetweentheall-inswappriceandsomeacceptedbenchmarkrate,suchastheyieldonsimilarmaturitygovernmentbondscontinued-nextpage57DerivativesSwapTerminology(1/2)ReceiverSwapTerminologyTradedate Thedatethetermsoftheswapareagreedto.Alsoreferredtoasthefixingdate.Valuedate Thedaythatintereststartstoaccrue.Maybeeitherthesameasthetradedate(fordomesticcurrency)ortwodaysafterthetradedate(forforeigncurrencies)Refixingdate ThedaythatthefloatinginterestratesareresetEffectivedate Thedatethatinterestfortheprecedingperiodispaid.ItmaybeequaltotheRefixingdate(fordomesticcurrency)ortwodayslater(forforeigncurrencies)58DerivativesSwapTerminologyTradedate58DeComparingSwaps,Futures&Options59DerivativesComparingSwaps,Futures&OptSwapscanbeusedto...takeinterestrateriskhedgeagainstexistinginterestrateriskearnarbitrageprofitssynthesizeinstrumentswherenoneexistedbeforemanagethetimingofcash-flows60DerivativesSwapscanbeusedto...takeinUsingSwapstoTakeInterestRateRiskWecanuseswapsto:AssumeinterestrateriskwherenoneexistedbeforeORChangethenatureoftheinterestrateriskThreescenariosare:UsingswapsinisolationUsingswapstochangetheinterestrateriskofotherinstrumentsUsingswapstochangetheinterestrateriskofthebalancesheet61DerivativesUsingSwapstoTakeInterestRSwap#1:ReceiveFixed,PayFloatingCounterpartyBankSwaps-CashFlowsCharacteristics:Bankpays

FloatingBankreceives FixedBankprofitsif

InterestratesfallCashinstrumentsreplicated Buyafixed-couponbondfunded withfloatingratedeposits

62DerivativesSwap#1:ReceiveFixed,PayFlSwap#2:PayFixed,ReceiveFloatingCounterpartyBankSwaps-CashFlowsCharacteristics:Bankpays

FixedBankreceives FloatingBankprofitsif

InterestratesriseCashinstrumentsreplicated Issueafixed-couponbond.Invest theproceedsinafloatingrateasset.63DerivativesSwap#2:PayFixed,ReceiveFlSwap#3:FixedRateAssetSwaps-CashFlowsCounterpartyAssetUsingSwapswithOtherInstrumentsBank64DerivativesSwap#3:FixedRateAssetSwapsSwap#4:FloatingRateAssetsSwaps-CashFlowsAssetBankCounterparty65DerivativesSwap#4:FloatingRateAssetsUsingSwapstoAdjusttheBalanceSheetIntheswapsabove......wehaveseenhowtochangetheinterestrateriskcharacteristicsofanexistingassetorliability,orsimplyassumeinterestrateriskwherenoneexisted.Next......whenanorganizationwantstoadjusttheinterestrateprofileofit’sbalancesheet.66DerivativesUsingSwapstoAdjusttheBalaIfGAP=0Bank’sinitialbalancesheetismatched,immunizingthebankfromadversechangesininterestrates.Preventsbankfromprofitingfromexpectedmovementsininterestrates.Cheapertouseinterestrateswapsthencashinstruments.RateSensitiveAssets-RateSensitiveLiabilities=GAPAdjustingGAP67DerivativesIfGAP=0RateSensitiveAdjusSwap#7:BalanceSheetAdjustmentsSwaps-CashFlowsCounterpartyAssetLiabilityBank68DerivativesSwap#7:BalanceSheetAdjustmSwap#8:BalanceSheetAdjustmentsSwaps-CashFlowsCounterpartyAssetLiabilityBank69DerivativesSwap#8:BalanceSheetAdjustmSwap#9:BalanceSheetAdjustmentsSwaps-CashFlowsCounterpartyAssetLiabilityBank70DerivativesSwap#9:BalanceSheetAdjustmSwap#11:HedgingSwaps-CashFlowsCounterpartyAssetLiabilityHedgingWithInterestRateSwapsBank71DerivativesSwap#11:HedgingSwaps-CashSwap#13:BasisSwapSwaps-CashFlows6monthLIBOR3monthLIBOR6monthLIBOR3monthLIBORCounterpartyCounterpartyBankCounterparty72DerivativesSwap#13:BasisSwapSwaps-CaArbitrageAgainstCashInstrumentsSwap#15:LiabilityArbitrageSwaps-ArbitrageLIBOR8.75%8.50%BankCounterpartyBondLiability73DerivativesArbitrageAgainstCashInstrumWhySwapArbitrageOccurs

Swaparbitragecanoccurforseveral reasons:Swapslinkedtoanindexofaverageborrowing costsSubsidizedfinancingSpeedatwhichnewinformationisincorporatedinto pricesSupplyanddemandimbalancesCreditornewissuearbitrage74DerivativesWhySwapArbitrageOccurs SwaCurrencySwapssimilartointerestrateswaps(involveanexchangeofinterestrateflows)addtwoadditionalcomponentsinterestrateflowsarepaidindifferentcurrenciesexchangeofprincipalatthematuritydateoftheswap75DerivativesCurrencySwapssimilartointerCurrencySwapsSterlinginterestflowsDollarinterestflowsSterlingprincipalflowDollarprincipalflowCompanyBCompanyA76DerivativesCurrencySwapsSterlinginteresHedginganExistingCurrencyExposureCompanyAfromUKissuedabonddenominatedindollars,exposingittoexchangerisk.Toeliminatetheexchangeriskondollarbond,itentersintoacurrencyswapwithCo.Bwherebyitreceivesinterestdenominatedindollarsandpaysinterestdenominatedinsterling.Atthematuritydateoftheswap,Co.AwillpayCo.Bsterlingandreceivedollars

(attheexchangeratefixedattheswapinitiationdate),whichitwillusetoredeemthebond.77DerivativesHedginganExistingCurrencyESampleSwapsQuestionAsabankmanager,youarefacedwiththefollowingproblem.CompanyAcanborrowfixedrateat8.0%andfloatingrateatLIBOR+25basispoints.CompanyBcanborrowfixedrateat9.0%andfloatingrateatLIBOR+50basispoints.CompanyAwantstohavefloatingratedebtandCompanyBwantstohavefixedratedebt.Theyhaveapproachedyou,thebankmanager,toseeifyoucouldhelpthemtoattaintheirdesiredtypesofdebtatalowercostthaniftheyweretofunddirectlyinthemarket.Ifyoudoso,youwouldliketomake5basispointsyourself.Whatwouldyoudo?AssumethatyouwillsplitanybenefitequallybetweenAandB(afteryougetyour5basispoints)78DerivativesSampleSwapsQuestionAsabankSolutiontoSwapsQuestionCalculatethetotalnetbenefit,whichisequaltothedifferenceinthefixedratemarketminusthedifferenceinthefloatingratemarket.Fixedratemarket9.0%-8.0%= 1.00%FloatingratemarketL+.50%-L+.25%= .25%

NetBenefit .75%Deductfeetothebanker .05%BenefittobesplitbetweenA&B .70%BenefittoA(0.70%)(.50)=35bpBenefittoB(0.70%)(.50)=35bp

79DerivativesSolutiontoSwapsQuestionCalcCompanyABankCompanyBFixed@8%LIBOR+.50%LIBORLIBORFixed1Fixed2TocalculateFixed1:First,refertohowmuchCompanyAwouldhavetopayifitborrowedfloatingratemoneydirectlyinthemarket.ThendeductthenetbenefitduetoAundertheswap.ThisisA’s‘allincost’offinancing.Thisisequaltothesumof:LIBOR(paidbyAunderthefloatinglegoftheswap)plusthespreadinthefixedlegoftheswap.SolutiontoSwapsQuestion80DerivativesCompanyABankCompanyBFixed@SolutiontoSwapsQuestionOnthepreceedingpage,wesolvedforthefixedpaymentreceivedbyCompanyA(Fixed1).ThereisanalternativewaytosolvetheswapsproblemusingasimplerelationshiptosolveforthefixedpaymentmadebyCompanyB(Fixed2).Itis:

NetLIBORcosttoB(LIBORout-LIBORin)+X(theunknownfixedpaymentmadebyCompanyB)=

FixedrateifBborroweddirectlyinthemarket-B’sproportinatebenefitundertheswap.

SolveforX.81DerivativesSolutiontoSwapsQuestionOntSampleSwapsQuestionYouarefacedwiththefollowingsituation.Company FixedRate FloatingRateABCCompany 6.0% LIBOR+1/8%XYZCompany 7.35% LIBOR+3/8%Questions:Whatisthetotalnetbenefittodoingaswap?WhichcompanyhasthecomparativeadvantageinthefloatingratemarketConstructaswapwherebythebankergets10basispointsandtheremainingbenefitissplit75%toABCand25%toXYZ.82DerivativesSampleSwapsQuestionYouarefSolutiontoSwapsQuestionCalculatethetotalnetbenefit,whichisequaltothedifferenceinthefixedratemarketminusthedifferenceinthefloatingratemarket.Fixedratemarket7.35%-6.00%= 1.35%FloatingratemarketL+3/8%-L+1/8%= .25%

NetBenefit 1.10%Deductfeetothebanker .10%BenefittobesplitbetweenABC&XYZ 1.00%BenefittoABC(1.00%)(.75)=75bpBenefittoXYZ(1.00%)(.25)=25bp

83DerivativesSolutiontoSwapsQuestionCalcABCBankXYZFixed@8%LIBOR+3/8%LIBORLIBORFixed1Fixed2TocalculateFixedA:First,refertohowmuchABCwouldhavetopayifitborrowedfloatingratemoneydirectlyinthemarket.ThendeductthenetbenefitduetoABCundertheswap.ThisisABC’s‘allin’costoffinancing.Thisisequaltothesumof:LIBOR(paidbyABCunderthefloatinglegoftheswap)plusthespreadinthefixedlegoftheswap.SolutiontoSwapsQuestion84DerivativesABCBankXYZFixed@8%LIBOR+3SolutiontoSwapsQuestionOnthepreceedingpage,wesolvedforthefixedpaymentreceivedbyABC(Fixed1)Thereisanalternative