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    FXD Vs Floating

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    Vishal
    The document compares fixed and floating rate loans over a 14 half-year period. It shows that for each half-year installment, the interest and total amounts are lower for the floating rate loan as the LIBOR increases over time. The net present value of the floating rate loan is lower, indicating it is less costly. It also discusses how the break-even increase in LIBOR depends on the yield curve shape. When the curve is flat, the break-even is smaller than when the curve is steep.

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    FXD Vs Floating

    Uploaded by

    Vishal
    441 views15 pages
    The document compares fixed and floating rate loans over a 14 half-year period. It shows that for each half-year installment, the interest and total amounts are lower for the floating rate loan as the LIBOR increases over time. The net present value of the floating rate loan is lower, indicating it is less costly. It also discusses how the break-even increase in LIBOR depends on the yield curve shape. When the curve is flat, the break-even is smaller than when the curve is steep.

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    Fxd vs Floating

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    The document compares fixed and floating rate loans over a 14 half-year period. It shows that for each half-year installment, the interest and total amounts are lower for the floating rate loan as the LIBOR increases over time. The net present value of the floating rate loan is lower, indicating it is less costly. It also discusses how the break-even increase in LIBOR depends on the yield curve shape. When the curve is flat, the break-even is smaller than when the curve is steep.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    441 views15 pages

    FXD Vs Floating

    Uploaded by

    Vishal
    The document compares fixed and floating rate loans over a 14 half-year period. It shows that for each half-year installment, the interest and total amounts are lower for the floating rate loan as the LIBOR increases over time. The net present value of the floating rate loan is lower, indicating it is less costly. It also discusses how the break-even increase in LIBOR depends on the yield curve shape. When the curve is flat, the break-even is smaller than when the curve is steep.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Download as xls, pdf, or txt
    of 15

    FIXED V/S FLOATING RATE LOANS

    LOAN AMT. $ 100


    FIXED RATE 4.00%
    FLOATING RATE MARK-UP 1.50%
    6 MONTH LIBOR (TODAY) 0.75%
    REPAYMENT TERMS 24 MONTH'S MORATORIUM
    10 EQUAL HALFYEARLY INSTALMENTS
    LIBOR ( 6 MTHLY INCREASE IN BP ) 0.38% -2.46

    FIXED FLOATING
    INST. INT. TOT. INST. LIBOR INT. TOT.
    AMT. AMT. AMT. AMT. AMT. AMT.

    HY-1 0.00 2.00 2.00 0.00 0.75% 1.13 1.13


    HY-2 0.00 2.00 2.00 0.00 0.80% 1.15 1.15
    HY-3 0.00 2.00 2.00 0.00 0.90% 1.20 1.20
    HY-4 0.00 2.00 2.00 0.00 1.25% 1.38 1.38
    HY-5 10.00 2.00 12.00 10.00 1.63% 1.57 11.57
    HY-6 10.00 1.80 11.80 10.00 2.01% 1.58 11.58
    HY-7 10.00 1.60 11.60 10.00 2.39% 1.56 11.56
    HY-8 10.00 1.40 11.40 10.00 2.77% 1.49 11.49
    HY-9 10.00 1.20 11.20 10.00 3.15% 1.40 11.40
    HY-10 10.00 1.00 11.00 10.00 3.53% 1.26 11.26
    HY-11 10.00 0.80 10.80 10.00 3.91% 1.08 11.08
    HY-12 10.00 0.60 10.60 10.00 4.29% 0.87 10.87
    HY-13 10.00 0.40 10.40 10.00 4.67% 0.62 10.62
    HY-14 10.00 0.20 10.20 10.00 5.05% 0.33 10.33

    NPV @ 2.50% 106.65 104.19

    WHEN THE YIELD CURVE IS FLAT, THE BREAK-EVEN


    INCREASE IN LIBOR IS MUCH SMALLER, THAN A
    SITUATION WHEN THE YIELD CURVE IS STEEP.

    FOR EG. FLAT CURVE STEEP CURVE

    6M 5.90% 3.50%

    10 Y 6.00% 6.50%

    WHAT HAPPENS WHEN THE YIELD CURVE IS INVERSE ?


    TALMENTS
    ( IN % P.A. )
    USD
    INTEREST
    EXCHANGE
    TOTAL
    FXD FLT
    HY-1 2.00 1.13 JPY
    HY-2 2.00 1.15 INTEREST
    HY-3 2.00 1.20 EXCHANGE
    HY-4 2.00 1.38 TOTAL
    HY-5 2.00 1.57
    HY-6 1.80 1.58 DEM
    HY-7 1.60 1.56 INTEREST
    HY-8 1.40 1.49 EXCHANGE
    HY-9 1.20 1.40 TOTAL
    HY-10 1.00 1.26
    HY-11 0.80 1.08 GBP
    HY-12 0.60 0.87 INTEREST
    HY-13 0.40 0.62 EXCHANGE
    HY-14 0.20 0.33 TOTAL

    SOURCE : A.V.RAJWADE
    RUPEE COST OF A FC LOAN
    IMPACT OF E.RATE & I.RATE VOLATILITIES

    91/2 92/3 93/4 94/5 95/6 96/7 91/7

    5.4 3.7 3.5 5.8 5.8 5.7 5.0 1


    60.3 0.8 0.4 0.4 8.6 5.1 10.9 2
    65.7 4.5 3.9 6.2 14.4 10.8 15.9 3
    4
    5
    6.4 3.9 2.7 2.4 0.8 0.6 2.8
    65.6 14.9 13.9 15.2 -8.3 -10.0 12.8
    72.0 18.8 16.6 17.6 -7.5 -9.4 15.6

    9.4 9.0 6.4 5.2 4.1 3.3 6.2


    62.5 2.6 -3.1 19.4 3.8 -7.7 10.8
    71.9 11.6 3.3 24.6 7.9 -4.4 17.0

    10.7 8.5 5.6 6.3 6.7 6.2 7.3


    56.6 -13.2 -0.5 8.8 3.3 12.7 9.4
    67.3 -4.7 5.1 15.1 10.0 18.9 16.7

    RCE : A.V.RAJWADE & CO.


    YEAR AVG, Y/Y COMP.
    RATE % %
    -------------- -------------- -------------- --------------
    93 31.33
    94 31.33 0.00% 0.00%
    95 31.33 0.00% 0.00%
    96 35.50 13.31% 4.44%
    97 36.50 2.82% 3.64%
    98 42.50 16.44% 6.12%
    MNO has a LIBOR based US$ 7 year bullet repayment loan. B
    highly capital intensive industry, it is anxious to eliminate th
    risk. The current LIBOR is 5.90 % and the dollar yield curve
    Considering historical yields also, MNO treasury believes th
    appropriate time to hedge the interest rate risk.

    Following proposals are received :


    1 a straight 7 year swap at 7.25%

    2 a 7 year swap cancellable at the option of the coun


    at the end of 5 years, at 6.75%

    3 a collar on the LIBOR 5 - 8 %


    Analyse and indicate the least risky proposal.

    RST has a GBP 30 mn loan, carrying a fixed interest rate of 7


    a bullet repayment at the end of 5 years. RST is desirous of
    the US$:GBP exchange risk. The current spot rate is $ 1.50 p

    RST is considering the following proposals :

    1 A swap into US$ at 6.5 %

    2 An exchange rate no worse than $ 1.50 for all GBP


    the flexibility to gain 40% of any dollar appreciation
    levels ( i.e. if on a payment date, the spot rate is $ 1
    applicable rate will be $ 1.46; if spot is 1.60, the app
    exchange rate will be $ 1.50 )

    Do both eliminate the exchange risk ?

    How do the alternatives compare in terms of price ?


    ar bullet repayment loan. Being in a MNO has a FIXED RATE 7.5 % US$ 3 year
    t is anxious to eliminate the interest rate highly competitive industry, it is anxious t
    and the dollar yield curve very flat. risk. The current $/INR exchange rate is IN
    MNO treasury believes this to be an 12 % p.a, available only up to 1 year. ( Th
    rest rate risk.
    SPOT RATE IS :
    FORWARDS ARE :
    1 YEAR FWD RATE :
    1 YEAR FWD PREM :
    e at the option of the counterparty MNO buys the principal and the interest am
    available period of 1 year @

    amount of loan :
    ky proposal. amount of interest for 3 years
    amount purchased :

    AFTER 1 YEAR :

    SPOT RATE IS :
    ng a fixed interest rate of 7.5% and FORWARDS ARE :
    years. RST is desirous of eliminating 1 YEAR FWD RATE :
    current spot rate is $ 1.50 per GBP. 1 YEAR FWD PREM. :

    proposals : INTEREST TO BE PAID IS :


    INTEREST PAYABLE:
    PRINCIPAL PAYABLE :

    se than $ 1.50 for all GBP outflows, with


    of any dollar appreciation from current MNO cancel & re-book the forward contrac
    nt date, the spot rate is $ 1.40, the
    .46; if spot is 1.60, the applicable AMOUNT OF CONTRACT :
    AMOUNT UTILIZED :
    BALANCE AMOUNT :

    FWD CONTRACT AMOUNT :


    n terms of price ? FWD CONTRACT RATE :

    CANCELLATION GAIN / (LOSS) :


    CONTRACT RATE :
    CANCELLATION RATE :
    AMOUNT CANCELLED :
    GAIN / (LOSS ) :
    I.E.
    NET RATE :

    BOOKING SPOT RATE


    PREMIUM PAID FOR 1ST YEAR
    PREMIUM PAID FOR 2ND YEAR

    THIS IS SAME AS :

    NEW FWD CONTRACT RATE


    CANCELLATION GAIN / ( LOSS )

    SPOT RATE RISK BECOMES FORW

    THEREFORE, AN IMPERFECT HEDGE


    D RATE 7.5 % US$ 3 year bullet repayment loan. Being in a
    ve industry, it is anxious to eliminate the $/INR rate
    $/INR exchange rate is INR 43 per $ and the forwards are.
    ble only up to 1 year. ( The loan amt is $ 1 mio )

    43.00 INR PER $


    ARDS ARE : 12.00% P.A.
    FWD RATE : 48.16
    FWD PREM : 5.16 INR PER $
    rincipal and the interest amount forward for the
    of 1 year @ 48.16

    1,000,000 $
    st for 3 years 225,000 $
    1,225,000 $

    40.00 INR PER $


    ARDS ARE : 2.00% P.A.
    FWD RATE : 40.80
    FWD PREM. : 0.80 INR PER $

    E PAID IS : 75,000
    150,000
    1,000,000

    e-book the forward contract : ( Assume zero transaction costs )

    NTRACT : 1,225,000
    75,000
    1,150,000

    T AMOUNT : 1,150,000
    40.80

    GAIN / (LOSS) :
    48.16 INR PER $
    40.00 INR PER $
    1,150,000 $
    (9,384,000) INR
    (8.16) INR PER $
    43.00
    FOR 1ST YEAR 5.16
    FOR 2ND YEAR 0.80

    I.E. 48.96

    TRACT RATE 40.80


    GAIN / ( LOSS ) (8.16)

    I.E. 48.96

    ISK BECOMES FORWARD PREMIUM RISK

    N IMPERFECT HEDGE
     U.S. TREASURIES
    Bills
    MATURITY CURRENT PRICE/YIELD
    COUPON DATE PRICE/YIELD CHANGE TIME
    3-Month N.A. 3/11/2005 3.40/3.48 0.02/.014 10:13
    6-Month N.A. 2/2/2006 3.61/3.73 0.02/.020 8:47
    Notes/Bonds
    MATURITY CURRENT PRICE/YIELD
    COUPON DATE PRICE/YIELD CHANGE TIME
    2-Year 3.875 07/31/2007 99-18/4.10 -59.70149253731 10:23
    3-Year 3.75 05/15/2008 98-30/4.16 -77.92207792208 10:23
    5-Year 3.875 07/15/2010 98-14/4.23 -134.1463414634 10:23
    10-Year 4.125 05/15/2015 97-30/4.39 -243.2432432432 10:23
    30-Year 5.375 02/15/2031 111-28/4.58 -526.3157894737 10:23
    5 YEAR BOND

    1 3.875
    2 3.875
    3 3.875
    4 3.875
    5 103.875

    4.23% 98.4298 0.4375

    10 YEAR BOND :
    1 4.125
    2 4.125
    3 4.125
    4 4.125
    5 4.125
    6 4.125
    7 4.125
    8 4.125
    9 4.125
    10 104.125

    4.39% 97.9310 0.9375

    5 YEAR BOND

    1 1.875
    2 1.875
    3 1.875
    4 1.875
    5 101.875

    1.76% 100.5458 0.546875


    10 YEAR BOND :
    1 3.5
    2 3.5
    3 3.5
    4 3.5
    5 3.5
    6 3.5
    7 3.5
    8 3.5
    9 3.5
    10 103.5

    2.91% 105.0163 0.015625


    FIXED V/S FLOATING

    2.50

    2.00

    1.50
    INTEREST IN $

    1.00

    0.50

    0.00
    HY-1 HY-2 HY-3 HY-4 HY-5 HY-6 HY-7 HY-8 HY-9 HY-10 HY-11 HY-12 HY-13 HY-14

    PERIOD
    FIXED RATE FLOATING RATE

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