Analyse de deux entreprises (document en anglais)

Whether the two firms would negotiate these rates depends on the relative negotiating

power of each firm, and the alternative rates for each firm in the alternate markets. That is,

the fixed-rate liability market for the finance company and the variable-rate liability market

for the insurance company.

5. In a swap arrangement, the variable-rate swap cash flow streams often do not fully hedge

the variable-rate cash flow streams from the balance sheet due to basis risk.

a. What are the possible sources of basis risk in an interest rate swap?

First, the variable-rate index on the liabilities in the cash market may not match perfectly

the variable-rate index negotiated into the swap agreement. This source of basis risk is

similar to the cross-hedge risk in the use of futures contracts. Second, the premium over the

index in the cash-market variable-rate liability may change over time as credit (default) risk

conditions change.

b. How could the failure to achieve a perfect hedge be realized by the swap buyer?

Swap pricing normally is based on a fixed notional amount over the life of the swap. If the

dollar value of the fixed-rate asset portfolio of the buyer decreases over time, a fixed119

notional amount swap agreement may not reflect accurately the desired interest-rate risk goals of the buyer over the life of the swap. This situation could occur as loans are amortized (repaid in the normal context) or as prepayment rates change on either loans or bonds as macroeconomic conditions change.

c. How could the failure to achieve a perfect hedge be realized by the swap seller?

The swap seller is subject to basis risk as discussed in part (a) above.

6. A bank has $200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with $200 million of fixed-rate deposits costing 9 percent. A credit union has $200 million of mortgages with a fixed rate of 13 percent. They are financed with $200 million of GICs with a variable rate of the T-bill rate plus 3 percent.

a. Discuss the type of interest rate risk each FI faces.

The bank is exposed to a decrease in rates that would lower interest income, while the credit union is exposed to an increase in rates that would increase interest expense. In either case, profit performance would suffer.

b. Propose a swap that would result in each FI having the same type of asset and liability cash flows.

One feasible swap would be for the bank to send variable-rate payments of the T-bill rate + 1 percent (T-bill + 1%) to the credit union and to receive fixed-rate payments of 9 percent from the credit union.

c. Show that this swap would be acceptable to both parties.

Credit Union Bank

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