1. Why might a firm want to use an interest rate swap? 2. What is basis risk? Explain it as it relates to a currency swap 3. The Bank of Tennessee has negotiated a plain vanilla swap in which it will exchange fixed payments of 4 percent for floating payments equal to LIBOR plus 92 percent at the end of each of the next three years. In the first year, LIBOR is 4 percent; in the second year, 4. percent; in the third year, LIBOR is 3 percent. What is the total net payment the Bank of Tennessee makes over the three-year period if the notional principal is $10 million? 5. Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at S50 million, with an interest rate ceiling of 7 percent and LIBOR as the index representing the market interest rate. Assume that LIBOR is expected to be 4 percent, 4.5 percent, and 5 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are S