A counterparty has declared bankruptcy. You have 6 deals outstanding with that c

Question

A counterparty has declared bankruptcy. You have 6 deals outstanding with that counterparty. The law allows you to net all the contracts Deal 001 002 003 004 005 006 File Claims with Receiver for:? Pay Receiver: Counterparty owes you You owe counterparty $105,000 ($220,000) $214,000 $173,000 ($184,000) ($230,000) Interest Rate Swaps Q8. (10 points) ABC Company and XYZ Company need to raise funds. ABC Company can borrow funds either at 5 percent fixed rate or at LIBOR+1 percent floating rate. XYZ Company can borrow funds either at 10 percent fixed rate or at LIBOR+3 percent floating rate. Describe how you could bring these two companies together in an interest rate swap that would make both firms better off while netting your bank a 1 percent profit.

Q8. (8 points) A counterparty has declared bankruptcy. You have 6 deals outstanding with that counterparty. The law allows you to net all the contracts. Deal 001 Counterparty owes you You owe counterparty $105,000 002 ($220,000) $214,000 $173,000 003 004 005 006 File Claims with Receiver for:? Pay Receiver: ($184,000) ($230,000) Interest Rate Swaps Q8. (10 points) ABC Company and XYZ Company need to raise funds. ABC Company can borrow funds either at 5 percent fixed rate or at LIBOR + 1 percent floating rate. XYZ Company can borrow funds either at 10 percent fixed rate or at LIBOR+3 percent floating rate. Describe how you could bring these two companies together in an interest rate swap that would make both firms better off while netting your bank a 1 percent profit.

Explanation / Answer

8) Statement showing amount to be paid/received

Since we own more than receiveable no claim will be filed

Interest rate swap

Thus Bank will take 1% and 2% will be distributed between the companies

Deal Counterparty owns you You own counter party Pay counterparty 1 105000 2 -220000 3 214000 4 173000 5 -184000 6 -230000 Total 492000 -634000 142000

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