Question

Two companies want to establish a swap contract with each other. What is a realistic option to form the contract using an intermediary bank? Borrower A gains 0.4%, borrower B gains 0.2% and bank gains 0.2%.

Borrower	Fixed Rate	Floating rate
Counterparty A: BBB-rated	5.50%	6-month LIBOR +0.5%
Counterparty B: AAA-rated	4.20%	6-month LIBOR +0%

Calculations must be shown clearly. You must interpret calculations and draw conclusions based on them.

Answer 1

Company	Fixed Rate	Floating rate	Assumed Preference
A	5.50%	LIBOR+0.5%	Fixed
B	4.20%	LIBOR	Floating
Due to intermediary bank below rates are applicable
Company	Rates received	Rates want to pay
A	LIBOR+0.5%	5.50%
B	4.20%	LIBOR
Total	LIBOR + 4.70%	LIBOR + 5.50%
Intermediary bank will receive what companies wants to pay and will provide the interest payable by companies to their banks.
Spread avaialble with bank	(LIBOR + 5.5%)-(LIBOR + 4.70%)
Spread available with bank	0.80%
Commision kept by bank	0.20%
Remaining spread	0.60%
Spread kept by A	0.40%
Spread kept by B	0.20%
Rates payable by each company
	Paid to Inter-Bank	Spread benefit	Net rates available
A	5.50%	0.40%	5.10%
B	LIBOR	0.20%	Libor-0.20%