What risks do the finance house and bank face, Corporate Finance

Assignment Help:

Question :

a) What are the rationales for interest and currency swaps?

b) A finance house and a bank each have a $1billion balance sheet. The finance house has lent out at a fixed rate of 22% pa for five years. The loans are interest only with a bullet repayment of the capital on maturity. It has financed them by the issue of certificates of deposit, paying the T-Bill rate plus 60 basis points.

The bank has access to savings deposits at a fixed rate of 4%. It has lent out these funds on a floating rate basis at the T-Bill rate plus 220 basis points.

All floating rates are reset each quarter and fixed rate payments are made at the same time. The 3-month T-Bill rate is initially 6%.

a) What are the spreads on which the finance house and the bank operate?

b) What risks do the bank face and finance house?

c) Prepare a swap that will immunise both spreads. Describe how it works and why it might be preferred to a policy of matching.


Related Discussions:- What risks do the finance house and bank face

Explain the trade finance, Question: Trade finance is much facilitated ...

Question: Trade finance is much facilitated by banks' intervention as guarantors for the execution of financial commitments on behalf of importers. Banks provide a large variet

How banks have contributed to outbreak of financial crisis, Question: 1...

Question: 1929/ 2009: a remake of the worst financial crisis affecting the whole world? Central Banks and Governments are implementing all sorts of rescue plans incorporatin

Efficiency, differentiate between pricing and allocative efficincy

differentiate between pricing and allocative efficincy

Mergers and Acquisition, #queM&A E-III Corp. is investigating the possible ...

#queM&A E-III Corp. is investigating the possible acquisition of Silicon Inc. Assume that both firms have no debt outstanding. E-III Corp. Silicon Inc. Pre-announcement stock price

Core principles for effective banking supervision, Question: a) The ne...

Question: a) The new capital management framework provides an upgrade of the old version in terms of new risk management techniques. What is the scope of application for the n

Advance demand information versus expert judgment, Table gives the average ...

Table gives the average MAPE, again for all SKUs with positive preview demand together (overall) and also per preview demand class. We remark that despite of the large differences

NPV, The First Bank of Ellicott City has issued perpetual preferred stock w...

The First Bank of Ellicott City has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of

Risk-return relationship, Problem 1 What is a bill of exchange? Explain...

Problem 1 What is a bill of exchange? Explain carefully the requisites for a bill of exchange to be valid.  Problem 2 You have a close friend, Peter, who is a renowned

Replacement decision, Baobab rolling mills owns a lathe machine which was p...

Baobab rolling mills owns a lathe machine which was purchased 10years ago at sh. 75 million. The machine had an expected life of 15 yrs at the time it was purchased, and management

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd