Two firms X and Y are able to borrow funds as follows: A: Fixed-rate funding at 4%
Question:
Two firms X and Y are able to borrow funds as follows:
A: Fixed-rate funding at 4% and floating rate at Libor − 1%.
B: Fixed-rate funding at 5% and floating rate at Libor + 1%.
Show how these two firms can both obtain cheaper financing using a swap. What swap would you suggest to the two firms if you were an unbiased advisor?
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