Reference no: EM132602446

Companies A and B face the following interest rates;

                                                   A                                B

U.S dollars (floating rate)              LIBOR + 0.5%       LIBOR + 1.0%

Canadian dollars(fixed rate)                  5.0%                      6.5%

Assume that A wants to borrow US Dollars at a floating rate of interest and B wants to borrow Canadian Dollars at a fixed interest rate. A financial institution is willing to arrange the swap and requires 50 basis points spread.

Required;

Question a) If the swap is to appear equally attractive to A and B, what rates of interest will A and B end up paying?

Question b) Draw a diagram showing how the swap will be designed.