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 ____. 120, 5.30%, SOFR – 0.5% 60, 4.90%, SOFR – 0.1% 40, 4.90%, SOFR – 0.1% None of the options in this question are correct. 140, 5.50%, SOFR – 0.5% ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question describes two multinational corporations with GBP debt and a proposed swap arranged by Barclays. To reason through the options, we need to evaluate how the swap would reallocate interest cost between fixed and floating legs, account for Barclays’ fee, and determine the resulting net costs for each MNC.

Option A: 120, 5.30%, SOFR – 0.5%
- If the total savings were 120 basis points, Barclays would charge 20 basis points (as a fee) of the total savings, leaving 100 basis points to be shared. Split evenly between the two MNCs, each would get 50 bp. A fixed rate paid to Barclays of 5.30% seems high given the pre-swap rates (JP at fixed 5.50% would like). The net cost to the UK MNC as SOFR – 0.5% would imply a floating benefit of 0.5 percentage points, which does not align with a 20 bp Barclays fee and the expected symmetry of the swap benefits. Overall, this combination appears inconsistent with the described fee structure and expected parity of gains between the two players.

Option B: 60, 4.90%, SOFR – 0.1%
- Here the total savings are 60 bp. After Barclays’ 20 bp fee, 40 bp remain to be shared, giving each MNC 20 bp. The fixed rate paid to Barclays being 4.90% is plausible given the current market conditions and the desire for JP to lock in fixed funding while UK moves to floating. The net cost to the UK MNC being SOFR – 0.1% indicates that its new floating exposure under the swap would be SOFR minus 0.1 percentage point, representing a small improvement over a baseline SOFR-linked cost. This setup is coherent: a modest total pool of savings, a reasonable fixed-rate payment to the intermediary, and a small but meaningful floating benefit attained by the UK entity.

Option C: 40, 4.90%, SOFR – 0.1%
- If the total savings were 40 bp, Barclays’ 20 bp fee would leave 20 bp to be shared, i.e., 10 bp per MNC. A fixed rate of 4.90% could be acceptable, but the net cost for the UK as SOFR – 0.1% would provide only 0.1 percentage point of floating benefit, while the overall remaining savings would be smaller (only 40 bp total). This combination struggles to reconcile the expected symmetry of savings between the two MNCs with the fixed and floating outcomes described. The numbers are tight and could be inconsistent with the described split of savings.

Option D: None of the options in this question are correct.
- This would be the safe choice if all given combinations failed to align with the logic of the swap, fee, and savings distribution described. However, the problem statement provides a specific pairing that can be consistent with a plausible swap structure, making this option unlikely unless there’s a fundamental misalignment in all others.

Option E: 140, 5.50%, SOFR – 0.5%
- A total savings of 140 bp would, after the 20 bp Barclays fee, leave 120 bp to split, i.e., 60 bp per MNC. A fixed rate of 5.50% paid to Barclays matches the JP MNC’s desire for fixed funding, but the resulting net cost for the UK as SOFR – 0.5% would imply a substantial floating benefit that seems inconsistent with a symmetrical split and the stated 20 bp intermediary fee. The combination appears overambitious given the equal sharing assumption and the UK’s needed floating adjustment.

Across these options, the most internally consistent pairing given the fee structure (Barclays takes 20 bp of total savings) and the expected equal sharing of remaining savings is the option that yields a total saving of 60 bp, a fixed rate to Barclays around 4.90%, and a net UK cost of SOFR – 0.1%. This configuration aligns with a modest overall gain from the swap, reasonable fixed-rate compensation to the arranger, and a small but meaningful floating benefit to the UK entity, reflecting the intended balance of the swap economics.

In summary, the reasoning supports a total savings figure in the vicinity of 60 bp with a fixed leg around 4.90% and the UK’s net cost expressed as SOFR minus a small basis point amount. The other options either misstate the scale of savings, assign an unlikely fixed rate to Barclays, or produce an implausible net floating outcome for the UK given the fee and sharing rules.

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