ANSWER THE QUESTION: What is the swap dealers risk after trading with Company A? Can you suggest a futures-based strategy that would help the swap dealer hedge the risk you identified in the first question?

Each of two companies decides to issue $10 million in 5-year debt on the same date. Each company consults its investment banker to consider alternatives. Market conditions are the following: Company A has told its banker that it desires a fixed rate liability. * Company A is advised that it can probably issue notes in a fixed rate structure at 4.30% or on floating rate terms at LIBOR + 90 bps. * Company B has told its banker that it desires a floating rate liability. * Company B is advised to expect a market rate of 4.85% for its fixed rate debt and LIBOR + 160 basis points (bps) for its floating rate debt. The banker also checks the swap market on each customer's behalf. In an email to each customer, the banker notes the best terms in the dealer market on a standard US dollar swap for a 5-year fixed-for-floating swap: * CUSTOMER PAYS 3.32% fixed to dealer and Receives LIBOR from dealer or CUSTOMER RECEIVES 3.30% fixed from dealer and Pays LIBOR to dealer