KLI and IIB are seeking loans at different rates. KLMB can design an interest rate swap where KLI pays the higher floating rate and IIB the lower fixed rate, splitting the difference of 0.75% equally among the parties for a 0.25% gain each.
TNB and Daibochi each have loans in different currencies. They can enter a currency swap where TNB exchanges yen for ringgit upfront and they exchange interest payments semi-annually and principal amounts at maturity, managing their currency risk.
A loan portfolio swap allows banks to diversify sectoral or regional loan concentration risk by exchanging portions of their loan portfolios, transferring that risk to the other party that
KLI and IIB are seeking loans at different rates. KLMB can design an interest rate swap where KLI pays the higher floating rate and IIB the lower fixed rate, splitting the difference of 0.75% equally among the parties for a 0.25% gain each.
TNB and Daibochi each have loans in different currencies. They can enter a currency swap where TNB exchanges yen for ringgit upfront and they exchange interest payments semi-annually and principal amounts at maturity, managing their currency risk.
A loan portfolio swap allows banks to diversify sectoral or regional loan concentration risk by exchanging portions of their loan portfolios, transferring that risk to the other party that
KLI and IIB are seeking loans at different rates. KLMB can design an interest rate swap where KLI pays the higher floating rate and IIB the lower fixed rate, splitting the difference of 0.75% equally among the parties for a 0.25% gain each.
TNB and Daibochi each have loans in different currencies. They can enter a currency swap where TNB exchanges yen for ringgit upfront and they exchange interest payments semi-annually and principal amounts at maturity, managing their currency risk.
A loan portfolio swap allows banks to diversify sectoral or regional loan concentration risk by exchanging portions of their loan portfolios, transferring that risk to the other party that
KLI and IIB are seeking loans at different rates. KLMB can design an interest rate swap where KLI pays the higher floating rate and IIB the lower fixed rate, splitting the difference of 0.75% equally among the parties for a 0.25% gain each.
TNB and Daibochi each have loans in different currencies. They can enter a currency swap where TNB exchanges yen for ringgit upfront and they exchange interest payments semi-annually and principal amounts at maturity, managing their currency risk.
A loan portfolio swap allows banks to diversify sectoral or regional loan concentration risk by exchanging portions of their loan portfolios, transferring that risk to the other party that
(1) Both Syarikat KL Infra (KLI) and Ipoh Industries Bhd (IIB) are in the market for a RM30 mil 5-year loan. Both companies have the same credit rating and have been offered the following rates for 5-year (balloon payment of principal) loan.
KLI IIB Fixed 12.5% 12.5% Floating 3-month KLIBOR + 3-motnh KLIBOR + 2.00% 2.75% Preferred loan Fixed Floating You work for KL Merchant Bankers (KLMB) and think that the quoted rates are arbitrageable by means of an interest rate swap. Design a fixed-for-toe-wing swap- Show the percentage gain to each party assuming the 'mispricing' is split equally among the three parties. (5) TNB has a 10-year, ¥50 million loan outstanding with a Japanese bank. The loan has a 2.5% annual interest rate. The loan was taken 5 years ago and so has 5 more years to go. Daibochi, a Japanese plastics maker with operations in Malaysia has just negotiated a RM 5 mil loan, 5-year loan with Maybank at 7.5% annual interest. Both companies are worried about the foreign exchange exposure. Design a currency swap that will enable both companies to manage exchange rate risk. (Assume debt servicing will be on 6- monthly basis, the spot yen/ringgit rate is 10 yen/ringgit.)
(9) How does a loan portfolio swap help banks diversify? What is the problem with loan portfolios that are concentrated either regionally or sectorally?
Guideline answer Q1:
KLI IIB Diff
Fixed rate 12.5% 12.5% 0% Floating rate KLIBOR+2% KLIBOR+2.75 0.75% % Mispriced= 0.75% Shared by three parties= 0.75%/3=0.25% each
KLI will borrow the floating rate ; IIB will borrow the fixed rate Example:
KLI IIB
KLIBOR+2%
12.5%
12.25% Swap Dealer KLIBOR+2.5%
KLIBOR+2%
12.5%
KLI: -(KLIBOR+2%)+(KLIBOR+2%)-12.25%=-12.25% compared to 12.5%; save 0.25%
IIB: -12.5%-(KLIBOR+2.5%)+12.5%= -(KLIBOR+2.5%) compared to KLIBOR+2.75%; save 0.25% Swap dealer: +12.25%-(KLIBOR+2%)+(KLIBOR+2.5%)-12.5%= +0.25% (earned)
Q5: TNB & Daibochi can enter a 5-year Ringgit/¥en currency swap.
1) TNB would buy ¥ 50 million at spot exchange rate with RM 5 million, and forward it to Daibochi which in turn gives TNB the RM 5 million that it receives from Maybank. 2) at the end of each year, TNB pays RM 375,000/2 being 7.5% interest on RM 5 million to Daibochi which in turn gives ¥en 1,250,000/2 as 2.5% interest on the ¥en 50 million loan. 3) at the end of year 5, TNB pays RM 5 million principal amount to Daibochi which in turn returns principal of ¥en 50 million to TNB.
Q9: A loan portfolio swap is one in which two banks exchange portions of their loan portfolio. Loan portfolio concentration can be either geographical or sectoral, so a bank essentially transfers its concentration risk from one sector or region to another bank, which has more knowledge/expertise. In doing so, the loan portfolio swap reduces the concentration risk of both parties.
