(1) Cocoa-Mocha-Chai (CMC) Co is a large listed company based in Switzerland and uses Swiss Francs as its currency.

A four-year CHF60,000,000 loan taken out to part-fund the setting up of four branches.

Interest will be payable on the loan at a fixed annual rate of 2•2% or a floating annual rate based on the yield urve rate plus 0•40%.

The loan’s principal amount will be repayable in full at the end of the fourth year.

Over-the-counter products

In addition to the exchange-traded products, Pecunia Bank is willing to offer the following over-the-counter derivative products to CMC Co:

(i) A forward rate between the US$ and the CHF of US$ 1•0677 per CHF1.
(ii) An interest rate swap contract with a counterparty, where the counterparty can borrow at an annual floating rate based on the yield curve rate plus 0•8% or an annual fixed rate of 3•8%.

Pecunia Bank would charge a fee of 20 basis points each to act as the intermediary of the swap.

Both parties will benefit equally from the swap contract.

Required:

(b) Demonstrate how CMC Co could benefit from the swap offered by Pecunia Bank. (6 marks)