a) Suppose that zero rates with continuous compounding are as follows: Maturity (months) Rate (% per annum)

3 2.0

6 2.2

9 2.4

12 2.5

15 2.6

18 2.7

Calculate 3-month forward interest rates for the second, third, fourth, fifth and sixth quarters. (5 marks) b) Companies A and B have been offered the following rates per annum on a $50 million five-year loan: Fixed Rate Floating Rate Company A 5.5% BBSW + 1.5% Company B 4.9% BBSW + 0.3% Company A requires a floating-rate loan: company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies.