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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.
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