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a) Distinguish between a Forward and a Futures contract. When would you prefer forwards instead of futures?
b) Forward contracts are not as liquid as Futures contracts. Why is this so?
c) Company A can borrow money at a fixed rate of 9 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus 2 percent or a fixed rate of 8.25 percent. Company A prefers a fixed rate and company B prefers a variable rate. A swap dealer can bring them together for a commission of 1% on the swap deal.
i) Is there any gain for the concerned parties through the swap deal?
If so, show a swapping arrangement, ensuring that both Company A and B are better off and the swap and the swap dealer gets the 1% cut.
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