Company A and Company B both seek funding at the lowest possible cost.Company A would prefer the flexibility of floating rate borrowing, while Company B wants the security of fixed rate borrowing.Company A is the more credit-worthy company. They face the following rate structure. Company A, with the better credit rating, has lower borrowing costs in both types of borrowing.

Company A

Prefers to borrow Floating

Fixed-rate cost of borrowing 7.250%

Floating-rate cost of borrowing: Libor + 0.5%

Company B

Prefers to borrow Fixed

Fixed-rate cost of borrowing 10.750%

Floating-rate cost of borrowing: Libor +1.5%

a)Assuming that a swap makes sense for both counterparties, what is the total potential gain from swapping?

b)Company A and Company B agree to share the cost savings equally. Design a swap to satisfy both counterparties.Assume that there is no swap bank. You can use a diagram if you wish to answer this question.