Two companies have investments which pay the following rates of interest
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Two companies have investments which pay the following rates of interest

Question 4.

Two companies have investments which pay the following rates of interest:

 

Fixed

Float

Firm A

6%

Libor

Firm B

8%

Libor+0.5%
Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate?
Please draw the cash flow chart.
Hint
Management"A derivative contract by which 2 parties exchange liabilities or cash flows from different financial instruments is a swap. Most swaps are characterized by notional principal amount oriented cash flows like bonds and loans. The financial instrument might be anything."...
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