Question 2 a) The treasurer of a corporation is trying to choose between FRA and Interest rate Futures to hedge interest rate risk. Discuss the advantages and dis-advantages of each. (30% weighting) b) Xavier Manufacturing and Zulu Products both seek funding at the lowest possible cost. Xavier would prefer the flexibility of floating rate borrowing, while Zulu wants the security of fixed rate borrowing. Xavier is the more credit-worthy company and has lower borrowing costs in both types of fixed and floating rate borrowing. The two companies have been offered the following rates per annum on a $20 million 3-year loans: - Page 2 of 4 - Preference Fixed Rate Floating Rate Xavier Floating 8% LIBOR+1% Zulu Fixed 12% LIBOR+2% A dealer is being asked to arrange the swap between the two parties and the dealer requires 1% compensation for her service. i. Explain the comparative advantages of each company in the types of borrowing (20% weighting) ii. Design a swap that will appear equally attractive to both companies and provide the compensation to the dealer. (35% weighting) iii. Calculate the net interest after the swap for both companies and the compensation for the dealer. (15% weighting) (Total 100% weighting)