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Fixed Floating FirmA 3% Libor + 1% Firm B 6% Libor + 2.5% a) Which firm has an absolute borrowing advantage? Which firm has a

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Fixed Floating FirmA 3% Libor + 1% Firm B 6% Libor + 2.5% a) Which firm has an absolute borrowing advantage? Which firm has a relative borrowing advantage? Which market is the relative borrowing advantage in? (2 Marks) b) Assume that the firms wanted to enter into a swap. What is the maximum amount of interest that the firms jointly would be willing to pay a financial intermediary to arrange the swap? (3 Marks) c) Design a swap contract that has Firm A effectively paying a fixed rate, Firm B effectively paying a variable rate, has a financial intermediary earning a 0.5% fee, and splits the remaining surplus between the firms equally. Show that each party to the swap earns or pays the percentage that it should under the swap agreement. (10 Marks)

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