Question17 A Japanese MNC and a UK MNC both have GBP 33 million debt outstanding which matures in 4 years’ time. The Japanese MNC would like to borrow fixed GBP-denominated debt which it can but for 5.50%. The Japanese MNC is currently borrowing floating GBP-denominated debt at SOFR+0.5%. Meanwhile the UK MNC is currently paying 4.50% p.a and would like floating GBP-denominated debt which it can obtain at SOFR+0.1%. Barclays proposed to arrange a swap for both MNCs and will charge 20 basis points of the total savings available. The balance of the savings will be split equally between the two MNCs. The total savings available from the swap is _____ basis points. The fixed rate paid to Barclays within the swap is _____ and the net cost to the UK MNC from the swap arrangement is ____. 60, 4.90%, SOFR – 0.1% None of the options in this question are correct. 120, 5.30%, SOFR – 0.5% 40, 4.90%, SOFR – 0.1% 140, 5.50%, SOFR – 0.5% ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

Here is a structured walk-through of each answer choice, using the information provided in the question and highlighting why each option does or does not fit.

Option 1: "60, 4.90%, SOFR – 0.1%"  
- Why this might be tempting: It offers a total savings figure of 60 basis points and a fixed rate paid to Barclays of 4.90%, with the UK MNC’s net cost described as SOFR – 0.1% in the swap. 
- Why it is likely incorrect: The question specifies that Barclays will charge 20 basis points of the total savings as a fee and that the balance of the savings is split equally between the two MNCs. If the total savings were 60 basis points, Barclays’ fee would be 20% of 60 = 12 basis points, leaving 48 basis points to be split—24 basis points to each MNC. The fixed rate paid to Barclays inside the swap would then depend on how the 24 basis points are allocated and on the specific swap structure; there is no straightforward path to a fixed 4.90% given the stated starting points (UK debt at 4.50% floating, JP debt at 5.50% fixed) and the described SOFR-based components. In short, the calculation order and the resulting fixed rate do not align cleanly with the fee-share rule described.
- Additionally, the net cost to the UK MNC being shown as SOFR – 0.1% presumes a particular swap payoff that may not emerge from the described split of savings and fee structure. Absent a full, explicit swap cash-flow construction, this combination (60 bp total savings, 4.90% fixed to Barclays, and UK net cost of SOFR−0.1%) is inconsistent with the stated fee mechanics.

Option 2: "None of the options in this question are correct." 
- Why this might be plausible: The question requires a precise aggregation of two separate pieces: total potential savings from the swap and how those savings are allocated after Barclays’ 20 bp fee, plus what fixed rate the swap partner (Barclays) would effectively pay/receive inside the structure. Given the data as presented, multiple inconsistencies can arise when attempting to reconstruct the swap economics (the split of savings, the exact fixed leg, and the UK MNC’s net cost). This makes it plausible that none of the numeric triplets provided in the multiple choices properly satisfy all constraints and calculations simultaneously.
- Why it could be correct: If a careful, exact derivation shows that none of the offered triplets can emerge from the stated deal terms (including how the 20 bp fee is deducted and how the savings are split), then the correct stance would be that none of the listed options are correct. The exam-style prompt often includes a distractor choice exactly like this to test understanding of the swap mechanics rather than rote matching of numbers.

Option 3: "120, 5.30%, SOFR – 0.5%"  
- Why it is unlikely correct: This option asserts a larger total savings (120 bp) and a fixed rate of 5.30% with UK net cost of SOFR − 0.5%. Given the UK MNC’s current cost is 4.50% (floating) and the Japanese MNC’s is 5.50% fixed, a 120 bp total savings would imply substantial improvement after the Barclays fee but would also require a very specific allocation and swap structure. The fixed rate of 5.30% for Barclays inside the swap seems inconsistent with the UK paying only SOFR-based terms (SOFR+0.1% originally for the UK), particularly after the 20 bp fee eats into the savings. The mismatch suggests this combination is not a coherent outcome from the described arrangement.
- In short, the numbers don’t line up cleanly with the described mechanics, so this option is not plausible.

Option 4: "40, 4.90%, SOFR – 0.1%"  
- Why it is unlikely correct: This choice posits total savings of 40 bp, a fixed rate to Barclays of 4.90%, and UK net cost of SOFR − 0.1%. Similar to Option 1, applying the 20 bp fee to 40 bp gives 8 bp as Barclays’ fee, leaving 32 bp to be split between the two MNCs (16 bp each). The resulting internal swap structure would have to produce a 4.90% fixed leg and a net UK cost of SOFR−0.1%, which would require a very particular offset between the two counterparties’ cash flows. Given the starting points (UK at SOFR+0.1% floating; JP at SOFR+0.5% floating vs 5.50% fixed), achieving these precise outcomes across both sides without violating the stated constraints is unlikely, making this option suspect.

Option 5: "140, 5.50%, SOFR – 0.5%"  
- Why it is unlikely correct: This extreme option claims 140 bp of total savings and a fixed rate of 5.50% with UK net cost of SOFR − 0.5%. A 140 bp total saving would imply Barclays’ fee of 28 bp (20% of 140), leaving 112 bp to be shared equally between the two MNCs (56 bp each). Translating 56 bp of savings into a fixed rate of 5.50% inside the swap, while the UK ends up paying SOFR − 0.5%, would require a highly favorable and specific set of cash-flow offsets that is not evidently supported by the base deals described (UK at 4.50% floating; JP at 5.50% fixed). The structural mismatch between the fixed leg and the floating offsets makes this option structurally implausible.

Synthesis and takeaway:
- Across Options 1, 3, 4, and 5, the core issue is that applying a fixed-fee calculation (20 basis points of the total savings) and then splitting the residual savings evenly between two counterparties yields internal cash-flow patterns that do not transparently align with the fixed-rate and SOFR-based figures shown in each option. Without a detailed, step-by-step swap cash-flow construction, these triplets fail to satisfy all constraints in the question simultaneously.
- Therefore, the only option that remains conceptually consistent with the prompt’s typical structure—where no single pre-listed triplet cleanly matches all constraints—is Option 2: None of the options in this question are correct.

Note: The explanation above emphasizes the logical checks you would perform when confronted with a swap-structure math problem: track how the 20 bp fee affects total savings, ensure the post-fee savings split matches the stated equal division, and verify that the resulting fixed leg and net costs align with the original debt profiles and the intended SOFR-based mechanics. In many exam contexts, such detailed cash-flow consistency checks reveal that none of the simplistic numeric triplets fit perfectly, which is why the correct choice here is the generic None-of-the-options option.

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