Question 1 Swaps (16 marks) (a) Company A wishes to borrow U.S. dollars at a fixed rate of interest. Company B wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects): Sterlin 11 .0% 10.6% US Dollars Company A Company B 0% 6.2% Required: (a) Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of 15 basis points per annum for each of the two companies. (4 marks) Company Company _Bank (b) A bank entered into a two-year currency swap with semi-annual payments 200 days ago by agreeing to swap $1,000,000 for 800,000. The bank agreed to pay an annual fixed rate of 5% (with semi-annual compounding) on the 800,000 and receive a floating rate tied to LIBOR on the $1,000,000. Current LIBOR and Euribor rates and present value factors are shown in the following table (LIBOR and Euribor are continuously compounding rates) Rates (p.a)