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Bf goodrich case - Assignment Example

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Thus, Goodrich portrays a saving of 20 basis points after their transaction costs. Subsequently, Rabobank will save a total of (2% - 1.8%) equal to 20 in its basis points. Subsequently, Morgan bank will collect 2% -…
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B.F. Goodrich Case Question Taking into assumption that the values x2 = 20 basis, and x1 = 100 basis. Therefore, 130?x1> 0, that is, 130> x1
X2? 12.5> 0, that is, x2> 12.5
We hence conclude the following:
Goodrich will pay at a fixed interest of: 11.2% + 1% = 12.2%. Thus, Goodrich portrays a saving of 20 basis points after their transaction costs. Subsequently, Rabobank will save a total of (2% - 1.8%) equal to 20 in its basis points. Subsequently, Morgan bank will collect 2% - 1.25% = 75 basis points in payment, in accumulation to the $125,000 one-time fee payment. Hence, the accumulated savings that this deal offers resulting from the swap is (5 + 20 + 75) that is equivalent to 100 basis points.
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Considering the techniques of the interest-rate swaps, the counterparties find the exchange useful since one bank possessed a pool of fixed-rate assets that are funded with floating rate debts and vice versa. Thus, the banks would be well of with the payment streams that closely relate to their income streams (Chen, pp.45-78). Hence, swapping their interests payments make sense. However, their failure to cure their asset/liability mismatches will put every party at a risk of losing their initial profitable positions.
Thus, the interest rates swaps will allow the saving banks to lock in the first spreads between their earnings as well as paying their rates of interests (Chen, pp. 45-63).
Works Cited
Chen, Y. What explains Credit default swaps bid-ask spread? Singapore : Singapore Management University, 2008. Read More
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