(a) Bonapart Ltd wishes to borrow 600 million euros for five years at a floating rate to finance an investment project in Italy. The lowest rate at which it can raise such a loan is Euro Libor + 1.75%. The company's bankers have suggested that one of their client companies Glosco, would be interested in a swap arrangement. This company needs a fixed interest loan of Euro 600 million. The lowest rate at which it can arrange the loan is 11.5% per annum. It could, however, borrow in euros at the floating rate of Euro Libor + 2.5%. Bonapart Ltd can issue a fixed interest 5 year bond at 10% per annum interest. The banker would charge a swap arrangement fee of 0.15% per year to both parties. Assess whether a swap arrangement is possible and if so, devise the swap so that both parties can benefit. [6 marks]

(b) Discuss the benefits and shortcomings of interest rate swaps. [7 marks]

(c) Differentiate between a STIR futures contract and a bond futures contract. [5 marks]

(d) What are currency swaps? Illustrate with the use of an example. [7 marks]

(e) Discuss how a FX swap is different from a currency swap.[5 marks]