Suppose that ABC Corp and XYZ Inc are looking to borrow $350,000 and can issue...
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- Suppose that ABC Corp and XYZ Inc are looking to borrow $350,000 and can issue 2-year debt at the following market rates:
| Firm | Market | Rate |
| ABC | Fixed | 4.8% |
| ABC | Floating | LIBOR + 3.1% |
| XYZ | Fixed | 6.3% |
| XYZ | Floating | LIBOR + 5.2% |
Suppose that Citigroup is offering a 1.3%/1.6% bid-ask spread on two-year swaps. That is, they are offering to be the fixed payer in a 2-year swap at a rate of 1.3% APR and a floating payer in a swap with a rate of 1.6% APR. Suppose also that ABC Corp wishes to borrow at a fixed rate while XYZ Inc wishes to borrow at a floating rate. Show that:
- ABC Corp is better off using a swap with Citigroup than directly borrowing from the market
- XYZ Inc is better off using a swap with Citigroup than directly borrowing from the market
- Citigroup can take both of these swaps and end up with positive profits on the deals.
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