Question #1 (10 marks) Companies A and B face the following interest rates: e Ae Be floating rate LIBOR+1% LIBOR+1.5% fixed rate 5.5% 7% Assume that A wants to borrow at a floating rate of interest and B wants to borrow a fixed rate of interest. A financial institution is planning to arrange a swap and requires a 50-basis-point spread. And the swap is designed to be equally attractive to A and B. (a) Which company has a comparative advantage in fixed-rate market and which company has a (2 marks) comparative advantage in floating-rate market? (2 marks) (b) How much is the total potential gain to all parties from the swap? (2 marks) (c) How much both A and B can be made better off from the swap? (d) What rates of interest will A and B end up paying? And draw the swap diagram. (4 marks)