TED SWAP Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

TED SWAP Case Study Analysis

Reduction in 30 year swap rate

In case, Mills have been called to post initial margin against the swap, he would require an additional cash collateral if the swap rates further decline. This will reserve the KTC to maintain some cash reserve to mitigate the problem.

Impact of increases in 30-year swap rates on customer risks

It is inherent in any over-the-counter contract and the other party might not be able to deliver on the promised payment, especially when the market interest rates rise because floating checks can earn more in exchange for the same return, customer risk increases. The success of the Mueller transaction also depends on their ability to renew the repurchase agreement every three months for 30 years. (or before the mark-up occurs).

30 Year Swap/Treasury Spread

The yield on long-term treasury bills is higher

In mid-October 2008, the U.S. Treasury Department announced the purchase of preference shares in 9 major financial institutions, primarily through the issuance of long-term Treasury bonds to raise funds. The huge increase in treasury supply accelerated their yields, and put pressure on swap spreads.

The capital exchanged in a Treasury bond transaction must be repaid at maturity (in this case 30 years), while the capital is not exchanged in a stock exchange swap, and the single payment must be recorded in the market. In addition, if the default of the client usually means a loss of capital, then the swap loss resulting from the default of the client, is only equal to the cost of changing the positions. In this way, the higher return reflects the relatively higher risk transfer method of government debt.

The lowest 30-year swap rate

Following the bankruptcy of Lehman Brothers, when trading with Lehman Brothers became invalid, investors sought alternative hedging transactions that provided significant market power. Fixed-rate bond issuers benefit from a steep yield curve, to pay variable interest rates. Second, sovereign debt managers typically shorten the maturity of outstanding debt (both require fixed interest rates through swaps). Third, institutional investors hope to benefit from arbitrage through swaps. Finally, the commercial banks are reluctant to cover their short-term deposits with variable interest rates. Therefore, variable interest rates in the interest rate swap market will be higher than the fixed interest rates. The swap rate was therefore lowered to reflect the increased demand for floating positions.

For fixed payers, another possible reason for lowering the swap rates is reduction of the hedging costs of floating swap traders. In addition, capital requirements and regulations may encourage the investors to use swaps instead of securities, thereby reducing swap yields (e.g. regulation of risk-weighted assets). A further explanation is that the market believes that governments, like any organization, can default by increasing the government bond yields................................

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