Pinduoduo Inc. is the largest interactive e-commerce platform in China and in the world. It is the second-largest online marketplace in China by number of users and number of orders. The treasurer plans to borrow the funds $500 million.

Although Pinduoduo Inc. has not previously used swaps for hedging purposes, the treasurer has asked Citi Bank to find a counterparty for a potential swap arrangement. The treasurer plans to borrow the funds at a variable rate of LIBOR plus 50 basis points.

Citi Bank has found a possible counterparty TianMall to enter into a swap with Pinduoduo Inc. The counterparty TianMall can borrow at an annual floating rate of LIBOR + 17% or a fixed rate of 61%. Citi Bank has quoted Pinduoduo Inc. a notional fixed rate of 56% for it to borrow. Citi Bank would charge a fee of 10 basis points to each party individually to act as the intermediary of the swap. Both parties would share equally the potential gains from the swap contract.

Required: (a) Draw a diagram or tabulate a detailed table for the swap arrangement between both companies. (8 marks)

(b) Discuss the advantages and disadvantages of using swaps as a means of hedging interest rate risk for Pinduoduo Inc. (7 marks)