B.F. Goodrich – Rabobank Interest Rate Swap Harvard Case Solution & Analysis

B.F. Goodrich – Rabobank Interest Rate Swap Case Solution

Rabobank’s advantage of discount rate

This case analyzes the interest swaps between Goodrich and Rabobank as it was highly required for both the organizations to manage the interest bearing ratio in order to generate positive cash flows.

Goodrich faced negative flows in the past years and wanted to borrow 50 million in order to cover the damage. For that, it wanted to fix therate over the time period of 8 years in order to recover the damage and to allow other players to show interest in the pair of swap.

Swap was successful for both the companies to manage their liquidity as well as to lowerthe interest payments. However, the role of Rabobank could play a major role to increase the earnings as well as cash flow activities with another company.

This deal can be attractive to Rabobank asit allows managing the floating rate in the given years. The LIBOR rate is calculated by adding the value to 0.50%, as well as the plus value is the discounted rate for Rabobank to reduce the cost of interest.

The results illustrate the true value of Rabobank, which shows the maximum amount of cash flows generated by the bank through the swap. The discount value can manage the cash activities of the bank and allowto handle the negative costs in the future.

Therefore,in order to provide a deal even more attractive, this rate can be fixed to the upcoming years which wouldRabobank to take advantage from it. It will also make sure that the bank can receive fixed interest from Goodrich and to cover the damage of LIBOR rate from the fixed interest receipts.

The overall process of interestrate swap is beneficial for Rabobank to exert pressure associated with the interest element, which wouldallow the investors to invest for longer period in order to receive fixed interest payments.

Attractive deal for Morgan (intermediary)

Interest rate swaps can also be beneficial for the third party, which manages the entire process of swaps in order to provide desire interest payments to both the parties. In this case, Morgan plays a vital role to manage the activities associated with swap.

Morgan was AAA credit rating bank of Dutch and was the most successful bank with almost 60%-70% of country deposits. This was an opportunity for the bank to increase its profit in terms of commission in swap.

Morgan is also the guarantor of both the organizations involved in swap and shows consistency because of its reputation in the market. Therefore,it works as an intermediary for both the performers and allows the activity to be perform in exact direction.

The opportunity of Morgan can be analyzed towards the profit with no principle amount. This deal can allow the bank to increase its funds for lending the amount to different companies in the country.

Morgan’s net profit can be calculated by adding the initial amount charged to Goodrich Company for allowing the rate to be fixed. Secondly, it has also assumed that Morgan will take service charges from both the organizations in order to handle the process over 8 years of maturity.

It also indicates that the bank cannot bear any loss according to the satisfaction of both the parties involved in swap. Even in default, the bank will still receive the amounts from another party and to reduce the pressure of future loss while offering the discount rate associated with LIBOR.

The results from the case show that Morgan will continuously charge from both the parties for swap and manage the accurate flow of activities throughout the years. It is also attractive for Morgan to increase the time period if it provides positive results for both the parties................

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