1. (8 marks) Consider two hypothetical companies, X and Y. Companies X and Y have...
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1. (8 marks) Consider two hypothetical companies, X and Y. Companies X and Y have been offered the following rates per annum on a $10 million 5-year investment. Floating Fixed Company X LIBOR+0.5% 8% Company Y LIBOR+1% 9.2% Company X prefers a floating-rate loan for the investment; company Y prefers a fixed- rate loan. To reduce financing costs, X borrows at a fixed rate, while Y borrows at a floating rate. A) Design a swap that will net a bank, acting as intermediary, 0.2% per annum and will appear equally attractive to X and Y. Why is such an arrangement possible? B) Design a swap contract such that company X has 0.4% interest savings and company Y has 0.3% interest savings. Compared with A), what is the risk associated with this swap arrangement
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