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Explain the three basic types of swaps

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Company AA and company BB each need $1 million in funds and are quoted the following rates in the fixed and floating markets. AA agrees to borrow at the fixed-rate and BB agrees to borrow at the floating-rate. Show all calculations.

Debt market

AA

BB

Fixed rate funds    

5.4%

6.4%

Variable rate funds

BBSW + 2%

BBSW + 2.2%

Required:

a) Structure a swap which allows the two companies to share the differential benefit equally.

b) What fixed rate would AA receive from BB if they negotiated to receive 75% share of the differential?

c) Why would a swap be arranged even if the differential is zero.

d) List and briefly explain the three basic types of swaps.

Reference no: EM133056391

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