ING Bank owns $300 million of variable-rate notes yielding BBR plus 4 per cent. These loans are financed by $300 million of fixed-rate bonds costing 5 per cent. ABS Building Society has $300 million of mortgage loans with a fixed rate of 7 per cent. The loans are financed by $300 million of CDs at a variable rate of bank-bill rate (BBR) plus 3 per cent.

a) What is the risk exposure of ING Bank? (2 marks)

b) What is the risk exposure of ABS Building Society? (2 marks)

c) Which FI will be the swap buyer? What would be the cash flow goals of each company if they were to enter into a swap arrangement? (4 marks)

d) Calculate dollar value of net interest income for both financial institutions (both with and without swap), assuming that at the end of the year BBR is equal to 2%. (8 marks)

e) Which FI have to pay and how much under the swap arrangement (note that it is only one payment)? (4 marks)