Company A, a British manufacturer, wishes to borrow U.S. dollars at a fixed rate of interest. Company B, a U.S. multinational, wishes to borrow British pounds at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects): British Pounds (GBP) U.S. Dollars (USD) Company A 10.2% 8.0% Company B 9.6% 7.0% A. Design a swap contract with a bank as intermediary (refer to the diagram in the Slide 14 of Lecture 7). The swap will produce a gain of 10 basis points per annum for the bank, and be equally beneficial for each company (ignore currency differences when allocating benefits in interest rates). Be specific about the following details on the swap contract: The currency and interest rate that A pays to the market The currency and interest rate that A pays to and receives from the financial institution The currency and interest rate that B pays to the market The currency and interest rate that B pays to and receives from the financial institution Hint: The bank will supply the (quoted) market rate for both companies. Also, the bank will incur a loss in GBP interest rates (pay > receive) but a gain in USD interest rates (pay < receive). B. Suppose that the two companies possess no credit or default risk in terms of their payments. What will be the risk to which the bank is still exposed from the swap? How can they hedge the risk?