Makkar (rajesh) sir

Extract from Makkar Sir note:

Chapter : Foreign Exchange Risk Management

Question 51

A, B & C are three companies, which are not finding suitable interest rates offerred for their funds requirement, have approached a bank for arranging interest rate swap.

Company                         A                                   B                           C

Objective                          Fixed Rate (%)           T bill rate          PLR based funds (%)

Fixed Rate                        14                                12                       15

T bill rate based funds    T bill + 4                    T bill + 3              T bill + 5

PLR based funds             PLR+2                       PLR+3                 PLR+4

The bank wants to arrange swaps between the three parties in such a way so that it can retain 25% of the total gain. The rest of the gain is to be distributed equally among the three parties.

You are required to show how the bank will structure the swap.

Solotion:

Company                           A                                    B                           C

Choice                               Fixed Rate                    T bill rate             PLR based funds

Fixed Rate                        14                                  12                          15

T bill rate based funds   T bill + 4                       T bill + 3               T bill + 5

PLR based funds            PLR+2                         PLR+3                  PLR+4

Take the high, low rate under each type and find the difference. Mark the highest difference.

Take the lowest rate againts that difference. Allot this type to the party to which it belongs.

Type                                   High                       Low                              Difference

Fixed Rate                       15                            12                                       3

T bill rate                           T+5                        T+3                                      2

PLR Rate                           PLR+4                 PLR+2                                 2

The lowest rate 2% is available to B. Hence, B will use fixed rate.

Now, we have two rates and two parties. Again repeat the above process.

Type                                   High                          Low                              Difference

T bill rate                           T+5                            T+4                                   1

PLR Rate                           PLR+4                     PLR+2                              2

Now, the highest difference is 2%. The lowest rate is PLR+2. It belongs to A. Hence, A will raise fund at PLR rate PLR+2.

Now, C will use T bill rate.

It was the solution of above mentioned problem.

mujhe samajh mein nahi aaraha hai...ye kaun sa logic hai....more specifically, im not understanding,

i. meaning of

"Take the high, low rate under each type and find the difference. Mark the highest difference.

Take the lowest rate againts that difference. Allot this type to the party to which it belongs."

ii.

Type                                   High                     Low                         Difference

Fixed Rate                       15                          12                                     3

T bill rate                           T+5                       T+3                                   2

PLR Rate                           PLR+4                PLR+2                             2

The lowest rate 2% is available to B. Hence, B will use fixed rate.

arey,,,there is two lower rate, which one is to choose?

iii.

"Now, the highest difference is 2%. The lowest rate is PLR+2. It belongs to A. Hence,

A will raise fund at PLR rate PLR+2. Now, C will use T bill rate."

Please help me. Please explain the logic of question.

Thanks in advance.