Consider the financing conditions in Table 18.2 on page 436 for companies A and B. Assume that a financial intermediary C offers both companies a payer and a receiver swap to realize comparative advantages. C takes 20 bps of the comparative difference to insure herself against default of one counterparty. The rest is divided equally between A and B. Sketch the new situation as in Figure 18.13 and compare the funding costs for A and B.

Table 18.2 Financing conditions for A and B

Fig 18.13

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Company Fixed Floating LIBOR + 50 bps (0.5%) LIBOR + 120 bps (1.2%) 6% 7.2% Afix = 1.2% Af. = 0.7% 6% 5.75% A B LIBOR LIBOR + 1.2% Swap