Companies A and B wish to borrow 5 million for a period of 3 years. The following
Question:
Companies A and B wish to borrow £5 million for a period of 3 years. The following table summarises the interest rates of the deals offered to each company:
Company | Fixed | Floating |
A | 3.4% | LIBOR+0.25% |
B | 4.75% | LIBOR+1% |
Company A would like to borrow at floating interest rate while company B would like to borrow at fixed rate. A financial institution has offered to design a swap deal and it charges 0.1% for that service. Answer the following questions:
a. Explain the comparative advantage position for both companies. [5 marks]
b. Explain clearly how the swap deal would work if the comparative advantage is shared equally between both parties. Illustrate the deal with a diagram and explain what is the final outcome for each party and why it is beneficial for both.
Expert Answer:
Comparative Advantage and Swap Deal Analysis a Comparative Advantage Company A Advantage in Floating ... View the full answer
