Ernie and Bert have received the following quotations for borrowing $20 million for 5 years: Fixed Rate Floating Rate Ernie 3% p.a. Libor - 0.15% p.a. Bert 4% p.a. Libor + 0.35% p.a. i) Identify who has the comparative advantage in each type of borrowing and explain why. ii) Suppose a fair swap was 3.45% paid against six-month libor flat, and a dealer required a 10 basis point spread on the fixed rate, design a swap that would permit Ernie to effectively borrow at floating rate and Bert to borrow at fixed rate by labelling A to F on the diagram below. iii) By engaging in this swap, how much will Bert be able to reduce his cost of borrowing below the market alternative for this borrowing type? Swap Dealer A B Ernie Bert C D E F [2+4+4=10 marks]