Question: Please answer this question and briefly explain Alles Ales (AA) and Barnicle Boats (BB) each need $5 million in funds and go to the market

Please answer this question and briefly explain

Alles Ales (AA) and Barnicle Boats (BB) each need $5 million in funds and go to the market for quotes.

They are quoted: for AA fixed: 7.4 per cent; floating: BBSW plus 2 per cent; for B fixed: 8.8 per cent; floating: BBSW plus 2.2 per cent.

If AA accepts the fixed-rate funds and BB the floating-rate funds, then they both decide they can reduce their cost of funds through a swap, structure a swap where they both benefit equally.

Thx

	AA	BB
Pays to market	- 7.4%	-(BBSW + 2.2%)
Pays to other	- BBSW	- 6.0%
Receives from other	+ 6.0%	+ BBSW
Net result	BBSW + 1.4%	8.2%

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