Which two companies may wish to undertake a swap

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Consider two companies, X and Z, which face the following borrowing rates , annualised and adjusted for the differential impact of taxes:

                                            Company X                  Company Z
US dollars (floating rate)            LIBOR + 0.5%             LIBOR + 1.0%
Canadian dollars (fixed rate)            5.0%                            6.5%

Assume that company X wants to borrow US dollars at a floating rate of interest and  company Z wants to borrow Canadian dollars at a fixed rate of interest. Design a swap  that will net a bank, acting as intermediary, 50 basis points and that will appear equally  attractive to both parties (i.e., company X and company Z).

Problem 1: In your own words, critically discuss the reasons for which two companies may wish to undertake a swap.

Reference no: EM133004474

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