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Consider the borrowing costs in USD faced by the following three companies: Fixed Floating A...

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Finance

Consider the borrowing costs in USD faced by the following three companies:

Fixed Floating

A 3.8% LIBOR + 0.2%

B 4.9% LIBOR + 1.7%

C 4.3% LIBOR + 1.3%

Assume that if any two companies enter the swap transaction, they split the possible savings equally.

a. Company B and company C want to engage in the swap transaction. Find the range for the swap rate within which both companies would benefit from the swap?

b. Suppose company B wants to borrow fixed-rate funds. Is it possible for B to reduce its cost of borrowing below 4.9%, and if so, what is the lowest possible cost it could achieve?

c. Suppose company B wants to borrow floating-rate funds. Is it possible for B to reduce its cost of borrowing below LIBOR + 1.7%, and if so, what is the lowest possible cost it could achieve?

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