Question

Question 2:

Companies Alpha and Beta LLC are currently both based in Chicago. They are both contemplating expanding their business by taking a $28 million loan which will be spread over five years. The following is what the market is currently offering them based on their risk profiles:

	Fixed Rate	Floating Rate
Alpha LLC	4.80%	LIBOR+0.2%
Beta LLC	6.40%	LIBOR+0.6%

(a) Which company has a comparative advantage in a fixed loan, and which company has a comparative advantage in a floating loan? Explain your answer.  

(b) If a swap arrangement is made, Alpha would be borrowing at the fixed or floating rates? Explain your answer.

(c) If Standard Chartered Bank, acts as a financial intermediary, seeking 0.4% per annum as their charges, what will be the net benefit from the swap deal, assuming the swap deal equally attractive to both Alpha and Beta?

(d) How much commission Chartered Bank would be making in 1 year?  

(e) Construct a swap deal, showing clearly all the parties involved.  

Answer 1