Floating-Loan-and-Receiver-Swap Assignment | Homework For You

On the expiry date of the swaption, HCB would like to convert the floating-loan-and-receiver-swap (i.e. the synthetic fixed-rate loan to FTS) back into a floating loan to FTS. Describe the transactions that HCB should enter into to achieve this goal and the cash flows between all counterparties for two scenarios:

• The market swap rate is less than or equal to 6%.
• The market swap rate is greater than 6%.

Herts County Bank (HCB) lends £5m to Fintech Solutions Ltd. (FTS), a fintech startup in North London, with floating payments at LIBOR. Taking into account its loan book and liquidity considerations, HCB decides to immediately convert this loan into a fixed-rate loan by entering a swap with a big London bank (BLB) to pay 3-month LIBOR and receive 6% fixed on a quarterly basis. Because it believes that interest rates may change substantially in the future, HCB would like the flexibility to terminate the swap, thereby returning to the status of a floating-rate receiver. To achieve this goal, HCB purchases an American-style payer swaption with another bank as the swap counterparty (SC) on the same day. This swaption allows it to enter into a swap paying 6% fixed quarterly and receiving 3-month LIBOR on a notional principal of £5m at the swaption expiry.Get Finance homework help today