Companies A and B face the following interest rates;

A B

U.S Dollars (Floating rate)LIBOR + 0.5% LIBOR + 1.0%

Canadian Dollars (Fixed rate)5.0% 6.5%

Assume that A wants to borrow US Dollars at a floating rate of interest and B wants to borrow

Canadian Dollars at a fixed interest rate. A financial institution is willing to arrange the swap and

requires 50 basis points spread.

Required;

a)If the swap is to appear equally attractive to A and B, what rates of interest will A and B end up paying?

b)Draw a diagram showing how the swap will be designed.