SCENARIO 4: DESIGN AN INTEREST RATE SWAP

LXN Corporation and Musgrave Minerals Limited (MGV) both wish to invest $20 million in 5 years and have been offered the rates shown in Exhibit 2. LXN wishes to invest at a floating rate of interest, while MGV requires a fixed-rate investment.

Task 4.1: This task requires you to design a vanilla swap that will appear equally attractive to LXN and MGV. Assume that a financial institution, acting as an intermediary, is planning to charge a 0.2% premium.

Task 4.2: Assume that today is 15th June 2020, the two companies enter to the $20 million 5- year swap you have designed in Task 4.1. The payments of the swap are made semi-annually, on 15th December and June each year. Note that LIBOR is determined on the previous settlement date. The accrual period is the actual number of days divided by 360. Your task is to complete the Template (Exhibit 3) below, which demonstrates the cash flows on the swap from the perspective of LXN.