Answer to Question #159854 in Economics for Cadbury

Question

1. Suppose you are working as a treasurer in Citibank and your bank has taken a PKR250 million loan. The interest on the loan is KIBOR+50bp paid semiannually. The duration of the loan is four years. As you will have to pay interest, you are worried that in the future interest rates are likely to increase and you want to hedge this position by entering into a Swap contract. You ask Bank Al-Habib whether they would be willing to enter into a swap agreement and they send you these semi-annual swap rates:

 

Consider the following questions:

a. What will the swap structure look like, given the fact that a bank Al-Habib requires an additional 5bp credit risk return for this client? Draw a diagram (4 marks)

b. What is the company’s cost of funds?

Answer 1

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