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A regional bank holding company recently bought a $100 millionpackage of mortgages that carry an average 8.5 percent yield. Theholding company has established a subsidiary to manage thispackage. The subsidiary will finance the mortgage by selling 90-daycommercial paper for which the current rate is 5.25 percent. Theinterest rate risk assumed by the subsidiary is evidenced by thedifference in duration of the mortgages at six years and theduration of the commercial paper at 72 days. The holding companythus decides to arrange an interest rate swap through anintermediary bank to hedge the subsidiary's interest rate risk.1.Should the subsidiary make floating-rate or fixed-ratepayments in the swap market? Specifically, should the subsidiarypay fixed and receive floating, or pay floating and receive fixed?Use the following data to select specific swap terms. Explain whythis swap should reduce the subsidiary's interest rate risk.•Pay 7.37 percent and receive floating at 3-month LIBOR•Pay 3-month LIBOR and receive 7.24 percent