An insurance company owns $50 million of floating-rate bonds yielding LIBOR plus 2 percent. These loans are financed with $50 million of fixed-rate guaranteed investment contracts (GICs) costing 7 percent. A finance company has $50 million of auto loans with a fixed rate of 12 percent. The loans are financed with $50 million of CDs at a variable rate of LIBOR plus 3 percent.

a. What is the risk exposure of the insurance company?

b. What is the risk exposure of the finance company?

c. Which FI would be the buyer and which FI would be the seller in the swap?

d. Propose a swap that benefits both FIs.