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Calculate and present diagrammatically final borrowing cost

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Reference no: EM132789158

Question - Suppose that firm A could borrow £100 million either at a floating rate of LIBOR plus 10 basis points or at a fixed rate of 5.2%. Furthermore, suppose that firm B could borrow £100 million either at a floating rate of LIBOR plus 50 basis points or at a fixed rate of 6.2%. Firm A requires a floating rate loan and firm B requires a fixed rate loan. Using a block diagram, design an interest rate swap which firm A and firm B could agree to use to transform their loan obligations.

Calculate and present diagrammatically the final borrowing cost of firms A and B when a financial intermediary who facilitates the swap earns 3 basis points (0.03%).

Reference no: EM132789158

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