$($b$)$ Alpha and Beta Compani$$s can borrow for a five$-$year term at the following rates:

Alpha Beta

Moody$$s credit rating Aa Baa

Fixed$-$rate borrowing cost $10\mathrm{.}5\%13\mathrm{.}0\%$

Floating$-$rate borrowing cost LIBOR LIBOR $+1\%$

Alpha requires a floating rate Loan while Beta requires a fixed interest rate loan for

commercial needs.

$($i$)$ Explain why entering into an interest rate swap agreement is justified by the two companies.

$(3$ marks$)$

$($ii$)$ Design an interest rate swap with the following terms and conditions

$1.$The Bank acting as intermediary earns a commission of $0\mathrm{.}3\%$ per annum$($borne equally by the two companies$).$

Alpha gains twice as much as Beta from the swap agreement.

The floating rate interest flow of the swap Agreement is LIBOR.

$(8$ marks$)$

$($iii$)$ Comment on the bank's assessment of currency fluctuation.

$(12$ marks$)$