AA Rate Commercial Bank has RM 200 million of floating-rate loans yielding the T-bill rate plus 2 percent. These loans are financed with RM 200 million of fixed-rate deposits costing 9 percent. A savings bank has RM 200 million of mortgages with a fixed rate of 13 percent. They are financed with RM 200 million of Certificate of Deposits with a variable rate of the T-bill rate plus 3 percent.

(a) Analyze the type of interest rate risk each financial institution faces.

(b) Propose a mutually beneficial swap that would result in each financial institution having the same type of asset and liability cash flow. Illustrate the proposed swap in the diagram.

(c) What are some of the practical difficulties in arranging this swap?