Kath and Kim each wish to borrow $5 million for five years, but Kath prefers to borrow at floating rate while Kim prefers fixed. However, Kath has a higher credit rating and has an absolute advantage in borrowing at both floating and fixed rate. They have obtained the following quotations for borrowing:

A swap dealer quotes a mid-rate of 3.45% p.a. against Libor and pays 5 basis points less than the mid-rate and receives 5 basis points more.

i) Design an on-market plain vanilla swap which will reduce both Kath and Kims borrowing costs and provide them with their preferred form of borrowing. Indicate what values are required for the letters A to F on the above diagram.

ii) By engaging in this swap, how much will Kim be able to reduce her cost of borrowing below the market alternative for her preferred borrowing type?

\begin{tabular}{|c|c|c|} \hline & Fixed Rate & Floating Rate \\ \hline Kath & 3% p.a. & Libor 0.15% p.a. \\ \hline Kim & 4% p.a. & Libor +0.35% p.a. \\ \hline \end{tabular} \begin{tabular}{|c|c|c|} \hline & Fixed Rate & Floating Rate \\ \hline Kath & 3% p.a. & Libor 0.15% p.a. \\ \hline Kim & 4% p.a. & Libor +0.35% p.a. \\ \hline \end{tabular}