Using swaps to convert Fixed to Floating and vice-verca

CFA Level III Derivatives
#1

Schweser Book4 Los31a Pg 214

X has a two year Fixed interest liability at 5%. He swaps this with receive fixed 5.5% and pay L+125bp

Then the synthetic floating rate should be

-5% + 5.5% - (L+125 bps), or with out brackets -5% + 5.5% - L-125 bps

The next impact of the above would be L-75bps

But the book gives L+75bps.

Y has a two year Floating rate interest liability at L+125bp. He swaps this with pay fixed 5.5% and receive L+125bp

Then the synthetic fixed rate should be

  • 5.5% + (L+125 bps) – (L+100bps) , or with out brackets - 5.5% + L+125 bps – L-100bps

The next impact of the above would be 4.75%

But the book gives5.25%.

Can anyone please let me know the error in my workings.

Thank you

#2

Everyone, my apologies. My calculation for cpty Y was wrong. The above equation results in 5.25% and not 4.75% as shown by me.

But I am not clear on the cpty X impact.

#3

he pays 5% on his fixed rate liab.

pays L + 1.25%, receives 5.5%

so net he pays L + 1.25% + 5% - 5.5% = L + 0.75%

#4

Y has a two year Floating rate interest liability at L+125bp. He swaps this with pay fixed 5.5% and receive L+100 bps

pay (L + 1.25%) receive (L + 1.0%) pay 5.5%

so net pay 5.5 + 0.25 = 5.75% fixed

#5

cpk123,

Understood now thank you very much.

I have few questions for which I have not received any interest.

Can you please let me know if there is a moderator who I can ask for getting some attention.

Thank you