1.Consider two hypothetical companies, X and Y. Companies X and Y have been offered the following rates...
Question:
1.Consider two hypothetical companies, X and Y. Companies X and Y have been offered the following rates per annum on a $10 million 5-year investment.
Company X: LIBOR+0.5% (Floating) 8% (Fixed)
Company Y: LIBOR+1% (Floating) 9.2% (Fixed)
Company X prefers a floating-rate loan for the investment; company Y prefers a fixed-rate loan. To reduce financing costs, X borrows at a fixed rate, while Y borrows at a floating rate.
A)Design a swap that will net a bank, acting as intermediary, 0.2% per annum and will appear equally attractive to X and Y. Why is such an arrangement possible?
B)Design a swap contract such that company X has 0.4% interest savings and company Y has 0.3% interest savings. Compared with A), what is the risk associated with this swap arrangement?