LC and WME both wish to invest $115 million in 5 years and have been offered the rates shown in Exhibit -1 below. WME requires a fixed-rate investment while KLC wishes to invest at a floating rate of interest.Exhibit-1
Fixed Rate
Floating Rate
KLC
3.2%
LIBOR
WME
3.5%
LIBOR + 1%
A-This task requires you to design a vanilla swap that allocates 80% advantage (i.e. gain) to KLC and 20% advantage (i.e. gain) to WME. Assume that a financial institution, acting as an intermediary, is planning to charge a 0.15% premium.
b-Assume that today is 15th June 2021, and the two companies enter the $115 million 5-year swap you have designed in Task A above The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. The accrual period is the actual number of days divided by 360. Your task is to complete the Template (Exhibit -2) below, which demonstrates the cash flows on the swap from the perspective of KLC & WME.
Date
LIBOR (%)
Days in period
KLC
receives ($)
KLC
pays ($)
Net cash
flow to KLC ($)
WME
pays ($)
WME
receives ($)
Net cash
flow to
WME ($)
15/06/2021
2.5
15/12/2021
3.1
15/06/2022
3.4
15/12/2022
2.6
15/06/2023
2.8
15/12/2023
1.5
15/06/2024
2.6
15/12/2024
2.9
15/06/2025
1.8
15/12/2025
2.9
15/06/2026