Problem1 Maturity (gears) Rid Offer 6.06 6.24 6.39 6.51 6.68 6.87 Suap rate 6.03

Question

Problem1 Maturity (gears) Rid Offer 6.06 6.24 6.39 6.51 6.68 6.87 Suap rate 6.03 6.2 6.35 6.47 6.65 6.83 6045 6.225 6.370 6.490 6.665 6.850 . 10 The table above shows the interest rate swap rates quoted by Goldman Sachs today. Answer the following questions using data from the table above (a) Currently Gillette is in the loan agreement with its lenders that will last for another 3 years. Under this agreement Gillette pays 6.45% fixed interest per annum. Because Gillette's treasurer believes that the rates would go down over this period, she decides to enter a swap with Goldman Sachs to transform this fixed rate loan into a floating rate oan. Design an interest rate swap between Gillette and Goldman Sachs. Show the swap in the diagram indicating the flow of payments by arrows and interest rates exchanged Gillete will pay Goldman Sachs LIBOR and receive 621% from Goldman Sachs. Note that in this case Goldman Sachs pays fixed so the bid rate must be used for 3 ycar LIBOR 6 45% Goldman Sachs Gillette 621% (b) Calculate the effective interest rate paid by Gillette after the swap in part a is entered Gillete pays to Lenders 6.45% pa Gillete pays Goldman Sachs LIBOR Gil Effective interest rate-LIBOR + (6.45%-621%)-LIBOR + 0.24% rate) from Goldman Sachs

Explanation / Answer

1.In this question it was mentioned that gillete has already entered into a fixed loan agreement for 3 years with its leaders.

2.So gillete is obligated to pay interest to the outsides at fixed 6.45%.

3.The agreement gillete enter with goldsmann sachs is to cover itself from expected decrease in interest rates in future.

4. The agreement between gillete and goldsmann sachs means

a. Gillete will pay LIBOR(floating rate) interest to goldsmann.

b.Goldsmann will pay Fixed rate of 6.21 mentioned in the charge above with is 3 year quote of goldsmann.

5.Direction of arrows:

a. The arrows which is pointing towards left coming from gillete indicates fixed rate interest paid by Gillete to its lenders @3.45%.

b.The arrow coming from Gillete and pointing towards glodsmann indicates Payment of LIBOR(floating rate interest ) to goldsmann under swap agreement.

c.The arrow coming from goldsmann and pointing towards gillete indicates payment for Fixed rate interest @3.21 %.

6.Diagram should be drawn in such a way that both the parties to the swap agreement should be assigned boxes and draw the arrows towards each other and mention the interest rate paid by two parties to each other.

7.Simple speaking gillete what to convert from fixed to float. So it entered into an agreement.Now it will pay Float to goldsmann and recieve Fixed from Goldsmann.Now it has to pay Fixed to lender.Payment of fixed to lender and receipt of fixed from glodsmann gets cancelled and Payment of Libor to glodsmann remains.

  

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