Question 2 a) In December 2015, Beck Co. and Miller Co. enter into an Interest rate swap agreement. Beck Co is a highly rated firm that prefer to borrow floating rate loan and Miller is a low- rated firm that prefer to borrow fixed rate loan. They have agreed on a five-year fixed for floating interest rate swap agreement whereby Beck Co. will provide floating rate payment at LIBOR +0.5% in exchange for fixed rate payment of 9.5% from Miller Co. The Notional principal is USD50,000,000 and the fixed rate is 9.5%. The following interest rate assumed the following values on the payment dates: Payment Date Interest Rate Dec 2016 8.0% Dec 2017 7.0% Dec 2018 5.5% Dec 2019 9.0% Dec 2020 10.0% Calculate the payments received by Beck Co. and Miller Co. on each payment date. (15 marks) Question 3 Suppose that the current spot exchange rate is AUD2.7450/ - AUD2.7550/ and One-year forward rate is AUD2.6450/ - AUD2.6550/. The One-year interest rate is 7.75% - 8.25% in Australia and 3.75% - 4.25% in UK. Assume that you can borrow AUD10,000 or 10,000. a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of AUD and determine the arbitrage profit/losses. (10 marks) b) Assume that you want to realize in term of GBP (). Show the CIA process and determine the arbitrage profit/losses in . (10 marks)