Question: Use your solution to the following problem to answer the question. Counterparties AA and BB face the following borrowing costs in the marketplace: AA BB

 Use your solution to the following problem to answer the question.

Use your solution to the following problem to answer the question. Counterparties AA and BB face the following borrowing costs in the marketplace: AA BB Fixed 5.60% 6.60% Floating 3.80% 4.05% AA desires a floating rate loan while BB desires a fixed rate loan. A dealer stands ready to pay 5.90% fixed rate against receiving a floating rate of 3.85% or receive a fixed rate of 6.30% against paying a floating rate of 4%. Assume that each party exploits its relative advantage and swaps with the other as proposed by the dealer: Then: The net gains for AA and BB are respectively 25 and 20 basis points 55 and 20 basis points 45 and 30 basis points 35 and 10 basis points

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