FLO Co$.$ and VAR Co$.$ have signed an interest rate swap for a period of $12$ years. FLO Co$.$ agreed to take out a loan at a rate of $9\mathrm{.}10\%$ for the full period, while VAR Co$.$ obtained a loan at the rate of SOFR $+2\mathrm{.}00\%.$ The SOFR rate for the current semester is $6\mathrm{.}75\%.$ Calculate the amount that will need to be exchanged for this semester on a $$18$ million notional. Specify who will have to pay this amount and the risks involved under this swap agreement.

A$.$ VAR Co$.$ will pay $$15,750$ to FLO Co$.$ Only FLO is facing a credit risk. The VAR Co$.$ is exposed to fluctuating interest rates. It will be subject to increases in the SOFR rate, which must be renewed each period.

B$.$ FLO Co$.$ will receive $$15,750$ from VAR Co$.$ Credit risk is greater for FLO Co$.$ FLO Co$.$ is exposed to fluctuating SOFR interest rates, while VAR Co$.$ is exposed to a rising credit spread.

C$.$ VAR Co$.$ will pay $$31,500$ to FLO Co$.$ Both companies face credit risk. FLO Co$.$ is exposed to fluctuating interest rates. It will be subject to increases in the SOFR rate, which must be renewed each period.

D$.$ FLO Co$.$ will pay $$31,500$ to VAR Co$.$ Both companies face credit risk. The VAR Co$.$ is exposed to fluctuating interest rates. It will be subject to increases in the SOFR rate, which must be renewed each period.