Lluvia and Paraguas. Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating-rate borrowing, while Paraguas wants the security of fixed-rate borrowing. Lluvia is the more creditworthy company. They face the following rate structure. Lluvia, with a better credit rating, has lower borrowing costs in both types of borrowing. Lluvia wants floating-rate debt, so it could borrow at LIBOR+1%. However, it could borrow fixed at 8.5%and swap for floating-rate debt. Paraguas wants fixed-rate debt, so it could borrow fixed at 12.5% . However, it could borrow floating at LIBOR+2%and swap for fixed-rate debt. What should they do? (LIBOR is 5.5%)

Lluvia's comparative advantage is 3.000%. (Round to three decimal places.) I know Lluvia can gain 4% on fixed and 1% on floating, Why the combative adv is 3%? and how to set the rates for each party in swap?

Lluvia's net interest after a swap with Paraguas is negative 5.500%. (Round to three decimal places.) Paraguas's net interest after a swap with Lluvia is negative 10.500%. (Round to three decimal places.) Lluvia's savings on borrowing versus net swap is 1.000%. (Round to three decimal places.) Paraguas's savings on borrowing versus net swap is 2.000%. (Round to three decimal places.) Therefore, Lluvia should borrow at the fixed rate and Paraguas should borrow at the floating rate.(Select from the drop-down menus.)