Comparative advantage in an interest rate swap (FRM T3-31)

[@IftekharHossainApu]

how do you get 4.350? how this number comes?

[@keoma5386]

Thank you ! We had this example in our text book but it was quite difficult to clearly understand. You did well !!

[@FazlulKarimChowdhuryNoman]

Thanks! I was struggling a lot to understand this concept.

[@bionicturtle]

glad to help, thank you!

[@HugoTandP]

That, sir, is a crystal-clear explanation, many thanks

[@jacobchacko4793]

Great video! Very helpful for my finance studies! Appreciate the excel very much!

[@sepjoadat]

Question is why in the floating market are their borrowing costs priced a lot lower than fixed market?

[@peterko8871]

The calculation of the 4.350% is not visible, makes the presentation less clear.

[@HennchesterCity]

Exactly what i needed. Thank you so much!

[@bionicturtle]

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[@HamzaAbbas_]

Thank you, very informative. Thanks for your explanation regarding the 4.35% in the comments as well!

[@Samiksha_W]

Thanks a lot ! Needed this clarity.

[@annochkaLondon]

But if the interest rates go up then the party paying LIBOR will be less better off... Can you advise, given that interest rate swap is an instrument of hedging, how do LIBOR paying party actually hedges its fixed rate exposure when it actually introduces uncertainty into its balance sheet...

[@TrungAnh-bb6wl]

I wonder why they swap at Libor but not any other numbers. For example: Libor + 0.1%.? Please explain this, thank you :) :)

[@anindadatta164]

Can a company borrow at same interest rate under both fixed and variable system? Or the fixed rate is higher due to higher risk. Suppose , fixed rate =v.rate, then from case of AAA it could be said that LIBOR is 4.1 %. By that logic , BBB can borrow at variable rate at 4.7 %. So the basic question is why would BBB enter a swap and increase his borrowing rate to 4.95 % by entering a swap agreement?

[@nicoleweyshu]

Thank you!! This video really helped :)

[@marwabizri8327]

Thanks alot!! But how did you get the 4.35% fixed in the case were F.Is are charging zero??

[@bionicturtle]

Hi Marwa, you can deduce it: the fixed-floating spread = 1.20 - 0.70% = 0.50% and as explained this is the total advantage to be shared (both gross and net when the FI charges zero). Next we ASSUME the counterparties share this advantage equally (but other assumptions can be made). If so, they each enjoy a 0.25% advantage. The 4.350% can be solved from EITHER counterparty's perspective: AAA Corp must improve its net, floating borrowing by 25 bps so it must gain from L - 10 bps to L - 35 bps; as it will pay LIBOR this must be achieved by receiving 35 bps more than its (external) external 4.00% borrowing rate, which is 4.35%. BBBCorp must improve its net, fixed borrowing by 25 bps from 5.20% to 4.95%; it receives LIBOR from the swap which funds the LIBOR component of its external L+0.60% borrowing, therefore it must pay fixed 4.35% in the swap to achieve the 4.95% = 0.60% + 4.35%. Thanks,

[@gireeshkodali8779]

@@bionicturtle Thanks a ton

[@kaiwang2924]

Simple beauty.

[@Leopoldyan]

NIce one