answer the question (c) & (d)

Alpha and Gamma need to raise funds to pay for capital improvements at their manufacturing plants. Alpha looks for a fixed-rate financing while Gamma targets a floating-rate loan. Alpha is a well-established firm with an excellent credit rating in the debt market, and it can borrow funds either at 5.0% p.a. fixed rate or at 6M HIBOR+0.75% p.a. floating rate. Gamma is a new technology start-up firm without a strong credit history. It can borrow funds either at 6.5% p.a. fixed rate or at 6M HIBOR + 3.25% p.a. floating rate. a What is the interest rate difference in borrowing fixed-rate loans between the two companies? What is the difference in borrowing floating-rate loans? Explain which company has a comparative advantage in fixed-rate loans and which company has a comparative advantage in floating-rate loans. What are the potential savings from an interest rate swap between the two companies? (7 marks) b With the help of a diagram, design an interest rate swap between Alpha and Gamma that will allow each of them to share benefits equally. (6 marks) c Evaluate the net effect of the cash flows (net borrowing cost) of both companies that would be involved and determine how many basis points of interest rate both companies could save from the swap contract. (6 marks) Consider a portfolio manager who is holding HKD200 million of longterm floating-rate ( 3MHIBOR+1.5%) bonds and wishes to reduce price risk by transforming the holdings into a synthetic fixed-rate portfolio. He expects the interest rate is going to decrease. After checking the interest swap market, he finds that a swap dealer is currently offering terms of receiving 3M HIBOR against paying fixed rate 6% p.a. d What swap would the portfolio manager establish? (6 marks)