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15. What is a plain vanilla swap? What are the rationales for entering into such a swap? Suppose a bank customer has a $ 1
15. What is a plain vanilla swap? What are the rationales for entering into such a swap? Suppose a bank customer has a $ 1 million loan on which she pays a 5% fixed rate. As the bank manager, you want to swap this 5% fixed rate into a floating rate in case rates rise. You receive prime rate minus 2.5% from your swaps dealer and pay 0.88% fixed. How does this swap convert the 5% fixed into a rate which floats with prime, and what floating rate do you pay with this swap arrangement? (8 pts)
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