Swaps

CFA Level III
#1

Here is a question on swaps that foxed me - A company wants to borrow 300 out of which 200 in US and 100 in foreign currency. It figures out it can get a better rate in US and so decides to borrow in US and swap for foreign currency. So, it initiates a swap to pay fixed in foreign currency and receive fixed USD for 100. After 2 years, it realizes that interest rates are expected to go down in the US. So, it decides to initiate a swap to take advantage of lower rates. It initiates a swap to pay floating and received fixed. The question is, how much should it swap for to take advantage of lower rates? a. 100 Million b. 200 Million c. 300 Million d. 500 Million

#2

If the company expects the interest rates go down, he is already well positioned with the Foreign curency swap. I guess he can go for a fixed-floating rate swap in US Dollars to take advantage of decreasing rates. So Is the answer a receive fix swap (as current swap rates are higher what it will be in the near future) with a notoional principal of 200 million? Or am I talking nonsense?

#3

200 is the right answer. What I am wondering is why not swap the entire 300 million. You are paying up a fixed rate for the loan, and you know interest rates are going down, you can use the opportunity to pay lower rates, isn’t it? Did I just overthink the question?

#4

i would agree CAreeerchange… the qording on this question sucks (shweser?) if you are borrowing 300M in USD… rates decrease, you’d refinance wouldn’t you?

#5

You have already converted 100 million with the first swap. You are receiving a fixed rate on US Dollar on that portion and that rate you are receiving is soon to be higher than the market rate( as it will decrease, and we assume foreign rate will not). So you do not need to alter it. The remaining 200 million part, you try to position yourself better.

#6

Hiya, but your loan amount is still 300 million. It’s just that 100 million of that you have swapped for a foreign currency. If you are getting a lower rate, wouldn’t you want to take advantage of it for the complete 300? The foreign currency swap can work it’s way and you could make some money be getting the benefit of lower rates. This is from Stalla.

#7

Yeah but you are already entered into a Fixed receiving rate for the $100M. In order to fix that, you would have to enter into 2 swaps, one to offset the current Swap, then the new swap to obtain the lower rates…

#8

i see… thanks guys… the question was worded really strange to me at first…