Interest Rate Swap

Parties A and B are offered the following rates on a $10 million 10-year loan.

Party A requires a fixed rate loan. Party B requires a floating rate loan.

Question 1) Suppose that the two parties CANNOT engage directly with each other and a bank will act as an intermediary. Design a pair of swaps such that the surplus is shared as follows:

Party A gets 1/2 of the surplus.

Party B gets no surplus.

The Bank gets 1/2 of the surplus.

Question 2) Suppose that the two parties CAN engage directly with each other and there is no need for a bank to act as an intermediary. Design a direct swap between the parties such that the surplus is shared as follows:

Party A gets 1/2 of the surplus.

Party B gets 1/2 of the surplus.

Company Fixed Rate Floating Rate A 17% Libor+ 10% B 12% Libor + 7%