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Comparati"e ad"antage $ 20 % #0 $ #0 cents per fruit Doris li&es apples and Jeremy li&es oranges' Doris would li&e to eat three apples a day' Jeremy would li&e to eat three oranges a day (ithout trading Doris must spend )0 cents a day (ithout trading Jeremy must spend *#'50 a day
Doris and Jeremy do an Apple+Orange ,wap Doris buys three oranges and Jeremy buys three apples' -hey swap their fruits' Doris spends 3 . 30 $ /0 cents Jeremy spends 3 . 30 $/0 cents Jeremy pays 05 cents to Doris Doris!s cost $ /0 % 05 $ 05 cents Jeremy!s cost $ /0 1 05 $ *#'35 2oth sa"e #5 cents' -ogether they sa"e 30 cents which is e3ual to the comparati"e ad"antage per fruit of #0 cents times 3 fruits'
Comparati"e ad"antage $ #'>< 0'25< $ #'55< p'a' 6aboban& needs floating rate financing to support its ?',' dollar denominated floating rate loans' 2'4' =oodrich needs fi5ed rate financing for long term to support its deteriorating financial condition' (ho should borrow in which mar&et@
$ost of Financing
Before the swap% 6aboban& cost of financing $ :;2O6 10'25< 2'4' =oodrich cost of financing $ #2'5< !fter the Swap 6aboban& cost of financing $ #0'9< 7interest to in"estors in Aetherlands8 1 7:;2O6 58 7swap payments to Morgan8 7#0'9<8 7swap payments recei"ed from Morgan8 $ :;2O6 5 2'4' =oodrich cost of financing $ :;2O6 10'5< 7interest to in"estors in the ?','8 1 #0'9< 1 4 7swap payments plus fee to Morgan8 7:;2O6 58 7swap payments recei"ed from Morgan8 $ ##'2< 1 4 1 5
Minim&m and Ma'im&m for ' and F 5 should be greater than 0'25< 7otherwise no incenti"e for 6aboban&8 5 should be less than #'3< 7otherwise no incenti"e for 2'4' =oodrich and+or Morgan8 4 should be greater than Cero 7otherwise no incenti"e for Morgan8 4 should be less than #'55< 7otherwise no incenti"e for 6aboban& and+or 2'4' =oodrich8 DenceE 0'25< F 5 F #'3< And 0 F 4 F #'55<
(ther Iss&es
#' Default 6is& 2' -he e"olution of interest rate swaps 3' Deri"ati"e e5posure of firms )&estions%
G#' (hat are the moti"ating reasons for the interest rate swap in the current case@ G2' Draw the swap diagram' G3' Assuming hypothetical :ibor ratesE show the e5change of dollar cash flows' G0' ,how how the swap transaction sa"ings might be shared among the three parties'