Q8

Astra has issued an 8% fixed-rate debt security whereas Pfiz has sold bonds paying LIBOR + 1% instead. The companies now would like to offset their risks - Astra is afraid that interest rates will go down and Pfiz is worried that they will go up. Explain how a dealer could set up a swap agreement that meets the goals of both companies and at the same time generates a profit for themselves equal to 0.50% of the notional involved. [8 marks]