an auto loan finance company would like to hedge its existing interest rate risk. The companys business is as follows:

• Originates 5-year auto loans to consumers at a 6% fixed interest rate.
• Funds its auto loan portfolio by borrowing 5-year loans from banks at 6-mth floating Prime Rate flat.

After calling around to various Counterparties (CP), the best swap rates Aloha was able to find were:

• 5-year Basis Swap at 6-mth Prime = 6-mth LIBOR + 1.2%.
• 5-year Interest Rate Swap at 6-mth LIBOR = Fixed 0.95%

Draw up a swap that will leave Aloha with Fixed spread on its auto loan business. In other words, interest rates (Prime or LIBOR) moving up or down will not impact its margins. Make sure to draw all boxes (entities) and arrows with labels of the interest rate flow. What is it final net interest spread in %? What credit risks remain for Aloha to manage?

**** this question needs to have the swap boxes drawn up. 5 boxes