Funds are generated through deposits at fixed rate

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London International Bank has issued £500 million loan to different borrowers. The average return on these loans is LIBOR + 3%. These funds are generated through deposits at fixed rate of 12%. London Merchant Bank has similar type of balance sheet; It has also issued £500 million loan to different borrowers at the fixed rate 15% and these funds are funded by deposits at LIBOR + 4%. Do you think these two banks would be interested in creating interest rate swap? If yes, please show details to support your argument.

Can you help me with this problem and show me the calculation steps?

Reference no: EM131312526

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