1. Borrowing costs of two companies, A and B, in the fixed rate and floating rate markets are given below.
Company B is a project and has raised floating-rate funds. It is looking into swapping its floating payment liabilities for fixed rate payment liability to manage its interest rate risk.
Company A has raised fixed rate funds and is looking into converting its fixed rate liabilities into floating rate liability. Show how Companies A and B can achieve their objectives including their ability to lower the funding costs though an interest swap deal.
2. A-How does interest rate swap work as a tool for hedging interest rate risk assossiated with project financing?
b- borrowing costs of a bank and a project are as follows:
Fixed rate market Floating rate market
Project 7% Libor + 1%
bank 5% Libor + 0.5%
3. A cogeneration project which bought an equipment from a British for £800,000 on 3 month credit wants to hedge its accounts payable against currency risk. It is considering using either currency forward or currency options contracts. If the following information is available on these contracts, what would you advise them to use? Justify your recommendation.
Forward contract: A three-month forward rate is $1.5400/£
Options contract: A three-month £ call at strike price of 1.5300 is priced at $1.50/£
A three-month £ put at strike price of 1.5300 is priced at $0.75/£