Leveraged Floater. JMI has issued a $12 million leveraged floater with semi-annual interest payments. The rate is 1.2 times LIBOR. The firm is planning to hedge the risk of this note with a bond paying 6 percent and a swap with a fixed rate of 4.4 percent.
In Situation 4, the net semi-annual cash flow is closest to:
A) $115,200.
B) $230,400.
C) $96,000.
<need a break>作者: bkballa 时间: 2011-7-11 19:23
A is correct based on CFAI logic
I do not agree how they present this lev. fl. hedge...作者: IAmNeil 时间: 2011-7-11 19:23
Yes, it is A... Can someone explain?
I really dont understand them...
<need a break>作者: strikethree 时间: 2011-7-11 19:23
alta168 Wrote:
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> You can refer to the text.
Good hint.... finally found the topic is not in notes!作者: bpdulog 时间: 2011-7-11 19:23
So the bond amount should be the same as the swap notional?
Leveraged Floater issued means 1.2Libor liability on 12m
Swap on 14.4m = libor vs 4.4 = 1.2libor on 12m vs 5.28% on 12m
so we just need to finance the 4.4% on the 14.4m swap =0.6336m
We have 12m from issuance of the floater so shouldnt we just long a 12m 6% bond? which would cover the swap and leave 86,400 pa or 43,200 semi annual?作者: Unforseen 时间: 2011-7-11 19:23
(6%-4.4%)*(1.2*12m)=$230,400.
semi-annual net cash flow: $230,400/2=$115,200.作者: bodhisattva 时间: 2011-7-11 19:23
To me, this question is incomplete.
We're paying:
1.2*LIBOR on an inverse floater
Receiving:
4.4% on a swap
6% on a bond
Yet, the question doesn't specify the terms of the floating rate side of the swap. Is it LIBOR flat, or LIBOR plus a spread? Obviously, for hedging purposes we can assume the floating rate could be 1.2*LIBOR but that may be an unrealistic assumption.
NO EXCUSES作者: nannan66 时间: 2011-7-11 19:23
you are wrong
leverage floater needs buy 1.2 x amount in bond and swaps it recieve semiannual 1.2x3% and pay 1.2x2.2% LIBOR offset so the answer is A
Edited 1 time(s). Last edit at Monday, May 16, 2011 at 08:59AM by goodman2011.作者: bboo 时间: 2011-7-11 19:23
i try to remember in the leveraged floaters the floating payments cancel each other out and the net result is the difference between the fixed rate entities multiplied by the leverage factor (1.2)作者: thommo77 时间: 2011-7-11 19:23
deriv108 Wrote:
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> SkipE99 Wrote:
> --------------------------------------------------
> -----
> > i try to remember in the leveraged floaters the
> > floating payments cancel each other out and the
> > net result is the difference between the fixed
> > rate entities multiplied by the leverage factor
> > (1.2)
>
> notes taken...concise and accurate.
I am with you...作者: Windjam 时间: 2011-7-11 19:24
SkipE99 Wrote:
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> i try to remember in the leveraged floaters the
> floating payments cancel each other out and the
> net result is the difference between the fixed
> rate entities multiplied by the leverage factor
> (1.2)
This is always I remembered it but I thought I was taking a short cut and therefore wasn't comfortable with it. so I think now there is nothing to worry about if you remember it this way.
