Delta plc and Magnum plc need to raise funds to pay for capital improvements at their manufacturing plants. While Delta plc is a well-established firm with a sound credit history, Magnum plc is a fledgling start-up without a strong credit history. The companies can borrow at the following rates from their respective banks. Magnum can borrow at 10% fixed under a special government backed lending scheme for start-ups. This scheme is not available to larger, more established companies.

Fixed Rate

Floating Rate

Delta plc

11%

LIBOR + 1%

Magnum plc

10%

LIBOR + 3%

Is there an opportunity for the companies to benefit by means of an interest rate swap? If yes, calculate the opportunity of gain.

Assuming that there is no intermediary and none of the companies make any profit from the swap deal, calculate the net borrowing positions of both the companies. Schematically demonstrate the interest payments.

Suppose that you have been hired at a bank that acts as a dealer in the swaps market and you know the borrowing rate information of your clients, Delta & Magnum. Describe how you could bring these two companies together in an interest rate swap that would make both firms better off, while netting your bank a 2% profit. Schematically demonstrate the interest payments.