Consider the borrowing costs in USD faced by the following three companies: Fixed Floating A...
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Finance
Consider the borrowing costs in USD faced by the following three companies:
Fixed Floating
A 3.8% LIBOR + 0.2%
B 4.9% LIBOR + 1.7%
C 4.3% LIBOR + 1.3%
Assume that if any two companies enter the swap transaction, they split the possible savings equally.
a. Company B and company C want to engage in the swap transaction. Find the range for the swap rate within which both companies would benefit from the swap?
b. Suppose company B wants to borrow fixed-rate funds. Is it possible for B to reduce its cost of borrowing below 4.9%, and if so, what is the lowest possible cost it could achieve?
c. Suppose company B wants to borrow floating-rate funds. Is it possible for B to reduce its cost of borrowing below LIBOR + 1.7%, and if so, what is the lowest possible cost it could achieve?
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