Company A wishes to borrow $10 million USD at a fixed interest rate for 5 years and has been quoted either 11% fixed or six-month LIBOR +1%. Company B wishes to borrow $10 million USD at a floating interest rate for 5 years and has been offered either 10% fixed or six-month LIBOR + 0.5%

a. Calculate the quality spread and identify the comparative advantage of each of the companies.

b. How may they enter into a swap arrangement in which each benefit equally?

c. Please show how the cash flows may benefit these companies within a swap framework.

d. What risks may this arrangement generate?

e. Include a Financial Intermediary (FI), which will obtain 10 basis points (b. p) as benefit and the rest of the benefit will be shared equally between the two companies. How are now the cash flows in the swap?