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Develop an interest rate swap

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Suppose a borrower, Grand Bhd., has a 3 year, RM1 million loan from Maybank and Maybank charges an interest based on KLIBOR +1 % payable annually. Meanwhile, Rich Bhd., manages a money-market fund for corporate clients. The fund size is RM1 million, invested mostly in 3-month MGS (Malaysian Government Securities) and commercial papers. The returns approximate the 3-month KLIBOR rate.

Develop an interest rate swap in which Grand Bhd. and Rich Bhd. can manage the interest rate risks. (Illustrate with a diagram and your answer must include assumption on KLIBOR rate)

Reference no: EM133073704

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