Both Firm X and Firm Y can issue fixed or floating rate debt securities. However, due to difference in credit ratings in the two companies, they borrow at different rates:

Firm

Fixed Rate

Floating Rate

X

6.8%

LIBOR + 3.1%

Y

9.2%

LIBOR + 4.2%

Assume that Firm X wants to borrow at floating rate and Firm Y wants to borrow at fixed rate. Design an interest rate swap contract which allows Firm X to reduce its cost of debt by 100 basis points. In this swap how much is the fixed rate?

A.2.4%.

B.4.7%.

C.6.8%.