Financial Futures Swaps

1.) Note: Subscript B= Bank, Subscript C= Corporation

A.) Quality Spread (Fixed)

= I C fixed – I B fixed

= 4.75%-3.625%

= 1.125%

Quality Spread (Floating)

= I C fixed – I B fixed

= (6 Mo LIBOR + 0.60%) + (6 Mo LIBOR + 0.25%)

=0.35%

Net Quality Spread = Quality Spread (Fixed)- Quality Spread (Floating)

= 1.125%-0.35% = 0.775%

B.) New Net Cost to Bank

= I B fixed + 6 Mo LIBOR - Receivables

=3.625% + 6 Mo LIBOR – 3.85%

=6 Mo LIBOR – 0.225%

New Net Cost to Corporation

= I C floating + additional cost – 6 Mo LIBOR

= 6 Mo LIBOR + 0.60% + 3.93%- 6 Mo LIBOR

= 4.53%

Cash Flows to Financial Institution

= [(Cost to Bank + Cost to Corp) – (I B fixed + I C Floating)] * $100,000,000

= [(6 Mo LIBOR – 0.225% + 4.53%) – (3.625% + 6 Mo LIBOR = 0.60%)] * $100,000,000

= 0.08 * $100,000,000

= $80,000

C.)

Possible Actual Gains bps

Bank 6 Mo LIBOR + 0.25% 6 Mo LIBOR + 0.60% 0.35%

Corporation 4.75% 3.93% 0.82%

Intermediary 0.395%

Total Gains 0.775%

2.)

A.)