Find the range for the swap rate within which both companies

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Reference no: EM131314092

Consider the borrowing costs in USD faced by the following three companies:

Fixed Floating

A 4.5% LIBOR + 0.6%

B 6.0% LIBOR + 1.7%

C 5.1% LIBOR + 1.0%

Assume that if any two companies enter into the swap transaction, they split the possible savings equally.

a) Company A and company B want to engage in the swap transaction. Find the range for the swap rate within which both companies would benefit from the swap?

b) Suppose company C wants to borrow fixed rate funds. Is it possible for C to reduce its cost of borrowing below 5.1%, and if so what is the lowest possible cost it could achieve?

c) Suppose company C wants to borrow floating rate funds. Is it possible for C to reduce its cost of borrowing below LIBOR + 1%, and if so what is the lowest possible cost it could achieve?

Reference no: EM131314092

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