QUESTION 1 urgent

1. The board of a company (Firm A) has agreed to pursue a new project and the Chief Financial Officer (CFO) speaks with several banks and determines that it may borrow:

   • Floating at BBSW + 3.65%pa
   • Fixed rate debt at 11.45%pa

   The CFO of a mid-sized corporate (Firm B) speaks with their banker and learns that it may borrow:

   • Floating at BBSW + 4.15%pa
   • Fixed rate debt at 13.15%pa

   Government debt is trading at 3.86%pa

   Both CFOs happen to approach the same investment bank, you, to explore funding options. You recommend that each party enter into a swap with your bank. Note: a prerequisite of your bank entering into swap transactions is the bank makes a minimum of 0.075% profit on each leg.

   Required

   Determine the swap strategy that maximises the benefit of the swap for each party, including your investment bank.

   1. Specify the swap cashflows (6 marks)
   2. Calculate the borrowing costs and the benefit to each party from entering into the swap. (3 marks)