Design a swap that will net a bank

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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.

Company X     Floating LIBOR+0.5% Fixed 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.

Problem 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?

Problem 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?

Reference no: EM132967030

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