Attik Inc. will shortly embark on a major project which will require $100 million of borrowing for five years. The Corporate Treasurer has obtained a number of quotes from potential lenders of the $100 million. The best fixed interest rate deal is at a rate of 8 per cent per year. The best floating rate deal is at LIBOR plus 2.5 per cent. The directors have stated a preference for floating rate borrowing for this project to better balance the overall borrowing profile of the firm. 

Battik Inc. also needs to borrow $100 million for five years. The best offers it has had from lenders is for it to pay 7 per cent per annum for fixed rate debt and to pay LIBOR plus 1.2 per cent for floating rate debt. It would like to borrow fixed rate debt given the likely pattern of its future cash flows. 

Describe a possible swap arrangement that will improve on the position for each firm compared with what they would pay if they simply borrowed in their preferred market (fixed or floating).