Reference no: EM132551206

Sunrise Bank can borrow one-year, floating-rate CDs at LIBOR+1% or fixed-rate CDs at 13%. Sunset Bank can borrow one-year, floating-rate CDs at LIBOR or fixed-rate at 11%.

Required:

a. Where is the comparative advantage of the two Banks?

b. What is the net financing cost rate if all the benefits going to Sunrise Bank? Please state all the relative rates for this swap arrangement for the two banks. Assume a swap intermediary fee of 10 basis points will be paid by Sunrise Bank as Sunset Bank receives no benefits from this swap transaction. 

c. What is the net financing cost rate if all the benefits going to Sunset Bank? Please state all the relative rates for this swap arrangement for the two banks. Assume a swap intermediary fee of 10 basis points will be paid by Sunset Bank as Sunrise Bank receives no benefits from this swap transaction.

d. What is the net financing cost rate if both Banks can mutually enjoy the benefits? Please state all the relative rates for this swap arrangement for the two banks. Assume both Banks agree to pay half of the intermediary fee of 10 basis points respectively.

e. List the possible factors that will determine the final swap arrangement.