Risk Latte - Quanto Tip Top Swap

Quanto Tip Top Swap

Third Party Contribution
May 20, 2005

Recently, a lot of quanto interest rate structures have flooded the market in Taiwan and the reason is the perception amongst corporates and local financial institutions that the US interest rates are not going to rise very rapidly; in the following structure the bank – a local Taiwanese bank – is betting on the fact the short term US rates will indeed rise very slowly and the structure gives a good upfront premium on the notional.

The risk for the bank is that if the US interest rates do rise rapidly for whatever reasons then the swap will not be so attractive for the payer of the USD LIBOR floating rate.

Maturity 5 years
Notional amount TWD 1 Billion
Upfront 50bps of notional amount
The Bank Receives TWD 90 day CP rate, quarterly, ACT/365
The Bank pays Coupon rate is subject to the following condition
(Quarterly, ACT/365):
(Calculated over the TWD notional amount and paid in TWD)
Year 1: if USD 3 m LIBOR <=4.0%   1.1%   otherwise USD 3 M LIBOR
Year 2: if USD 3 m LIBOR <=4.5%   1.1%   otherwise USD 3 M LIBOR
Year 3: if USD 3 m LIBOR <= 5.0%   2.0%   otherwise USD 3 M LIBOR
Year 4: if USD 3 m LIBOR <= 5.5%   2.0%   otherwise USD 3 M LIBOR
Year 5: if USD 3 m LIBOR <= 6.0%   2.0%   otherwise USD 3 M LIBOR

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