Consider the borrowing rates for Parties A and $B.$ A wants to finance a $$100,000,000$ project at an annual fixed rate. B wants to finance a $$100,000,000$ project at an annual floating rate.

Both firms want the same maturity of five years.

Firm

Fixed Rate

Floating Rate

A

$$10\mathrm{.}3\%$

Prime $+1\%$

Prime $+1\%$

B

$$8\mathrm{.}9\%$

Prime $+0\mathrm{.}5\%$

a$.$Is there any swap opportunity? Why?

b$.$ A swap bank quote an annual fixed rate of $8\mathrm{.}7\%-9\mathrm{.}0\%$ against the annual floating rate of Prime $+1\%.$ Please draw the diagram to illustrate the swap.

C$.$

What are the savings or gains $($in $\%)$ for firm A$,$ firm B$,$ and the swap bank, respectively?

d$.$ Assume that one$-$year later, the swap bank is quoting four$-$year dollar swaps at $7\mathrm{.}00-7\mathrm{.}30$ percent versus Prime $+1\%.$ What is the value of the swap in one$-$year? If the firm B wants to exist the swap agreement, what should firm B do