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