1. (8 marks) Consider two hypothetical companies, X and Y. Companies X and Y have...
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Finance
1. (8 marks) Consider two hypothetical companies, X and Y. Companies X and Y have been offered the following rates per annum on a $10 million 5-year investment. Company X Company Y Floating LIBOR+0.5% LIBOR+1% Fixed 8% 9.2% Company X prefers a floating-rate loan for the investment; company Y prefers a fixed-rate loan. To reduce financing costs, X borrows at a fixed rate, while Y borrows at a floating rate.
Design a swap contract such that company X has 0.4% interest savings and company Y has 0.3% interest savings. Compared with A), what is the risk associated with this swap arrangement?
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