Explain the differences between a plain vanilla swap position and a Eurodollar strip
Explain the differences between a plain vanilla swap position and a Eurodollar strip
MODULE 6 GROUP HOMEWORK
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1. Explain the differences between a plain vanilla swap position and a Eurodollar strip.
Plain Vanilla swap is traded in an OTC market while the Eurodollar strip is considered a derivative instrument.
Plain vanilla swap is typically a floating rate note and is swapped for a fixed interest rate swap. Eurodollar strip is protective against a changing interest rate scenario
2. What is the dealer’s bid and ask quotes on a five-year swap with a quoted 60/70 swap spread over a T-note with a yield of 6.5%?
Yield on T-note Bid = 6.50% + 0.6% = 7.10%
Yield on T-note Ask = 6.50% +0.7% = 7.20%
Hence, Bid and quotes on a 5-year swap is 7.10% / 7.20%
3. The Star Chemical Company wants to finance one of its production plants by borrowing $150 million for five years. Based on its moderate credit ratings, Star can borrow five-year funds at a 10.5% fixed rate or at a floating rate equal to LIBOR + 75 bp. Given the choice of financing, Star prefers the fixed-rate loan. The Moon Development Company is also looking for five-year funding to finance its proposed $150 million office park development. Given its high credit rating, Moon can borrow the funds for 5 years at a fixed rate of 9.5% or at a floating rate equal to the LIBOR + 25 bp. Given the choice, Moon prefers a variable-rate loan.
