Company A has obtained a loan at fixed rate of $13\%$ from a bank, M$.$ The company

expects the interest rate to decline and is willing to take the benefit of declining

interest rates. So$,$ The company A wantsto convert its loan into a floating rate. Bank

M offers LIBOR $+1\mathrm{.}9\%$ to the company.

Company B has borrowed from its bank, N$,$ at floating rate of LIBOR $+1\mathrm{.}5\%.$

Contrary to company A$,$ company B expects the interest rates to rise in future and

this will cause the company to pay more interest. Therefore, company B is willing

to covert its loan into a fixed rate one. Bank N offers fixed rate at $14\%.$

Assume the loan amount is $$1$m

A swap bank or financial intermediary company, P$,$ is ready to make the swap

arrangement between the two companies and the overall benefit of swap

arrangement will be shared among the two companies and P in the ratio of $5$:$5$:$4.$

i$.$ Determine the differential surplus that benefits each of the three parties.

ii$.$ Show how the interest rate swap deal will be arranged.

iii. Show how each party is benefitted from the swap deal.

iv$.$ Determine the parties net payoff if LIBOR is $9\%$ pa