Question

Let's assume that you are a financial intermediary.

a)Microsoft wants to receive LIBOR from you (i.e., you pay LIBOR) and pay 4% fixed rates to you (i.e., you receive 4% fixed rates) for $10 million notional principal for the next 5 years.
b)British Petroleum wants to pay LIBOR point to you (i.e. you receive LIBOR) and receive 4.20% fixed rates from you (i.e., you pay 4.20% fixed rates) for $10 million notional principal for the next 10 years.
c)Alphabet Inc. wants to pay LIBOR to you (i.e. you receive LIBOR) and receive 4.04% fixed rates from you (i.e., you pay 4.04% fixed rates) for $10 million notional principal for the next 5 years.
d)Samsung Corporation wants to pay LIBOR to you (i.e. you receive LIBOR) and receive 3.96% fixed rates from you (i.e., you pay 3.96% fixed rates) for $10 million notional principal for the next 5 years.
Find all pairs of back-to-back deals that gives you positive profits. There may be more than one such back-to-back deals. And, calculate such deals' dollar-amount profits per each 6 month periods.

Answer 1

To identify profitable back-to-back swap deals we compare fixed and floating rate agreements. A swap between Alphabet Inc. and Microsoft and one between Samsung and Microsoft would both yield a profit of $4,000 every six months for 5 years.

Step-by-step explanation:

The task at hand involves identifying potentially profitable back-to-back interest rate swap deals as a financial intermediary. We have four companies offering different terms on a notional principal of $10 million and varying periods. To find profitable pairs, we must match a deal where you pay LIBOR and receive a fixed rate with another deal where you receive LIBOR and pay a fixed rate with a lower interest rate.

In the given scenarios:

• Microsoft wants to pay a fixed rate of 4% and receive LIBOR.
• British Petroleum wants to receive a fixed rate of 4.20% and pay LIBOR.
• Alphabet Inc. wants to receive a fixed rate of 4.04% and pay LIBOR.
• Samsung Corporation wants to receive a fixed rate of 3.96% and pay LIBOR.

After reviewing the available deals, we can conclude:

• Taking money from Alphabet Inc. and giving to Microsoft will net a profit of 0.04% of the $10 million notional every six months for 5 years since you pay Microsoft 4% and pay Alphabet 4.04%.
• Taking money from British Petroleum and giving to Alphabet Inc. will result in a loss as you will receive 4.04% from Alphabet but have to pay 4.20% to British Petroleum.
• Taking money from Samsung and giving to Microsoft will net a profit of 0.04% for 5 years, as you pay Microsoft 4% and pay Samsung 3.96%.

Calculating the dollar amount of the profit per each 6 month period:

• From Alphabet Inc. to Microsoft: $10,000,000 * 0.04% = $4,000 every six months.
• From Samsung to Microsoft: $10,000,000 * 0.04% = $4,000 every six months.

Please note that these calculations assume constant LIBOR rates, which may fluctuate in reality, potentially affecting profits.