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loan. ExxonMobil would like to get a fixed rate loan. How much can Caterpillar save by entering a swap agreement?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter24: Enterprise Risk Management

Section: Chapter Questions

Problem 10MC

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Concept explainers

Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.

Question

The table below presents the costs of borrowing for Caterpillar and
ExxonMobil, and a Swap Bank quote against LIBOR. Caterpillar would like to
get a floating rate
loan. ExxonMobil would like to get a fixed rate loan. How much can Caterpillar
save by entering a swap agreement?
Caterpillar
ExxonMobil
Swap Bank Quote
33 bps
Ⓒ7 bps
23 bps
None of the alternatives
10 bps
Fixed-Rate Borrowing
Costs
4
5.5
Bid
4.1%
Floating-Rate Borrowing
Cost
Libor
Libor+1.1
Ask
4.33%

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