A company issues a floating-rate note that pays a rate of twice Libor on notional principal FP. It uses the proceeds to buy a bond paying a rate of ci. It also enters into a swap with a fixed rate of FS to manage the risk of the Libor payment on the leveraged floater.

A. Demonstrate how the company can engage in these transactions, leaving it with a net cash flow of 2(FP)(ci − FS).

B. Explain under what condition the amount (ci − FS) is positive.