Question 20 [7 Marks]

PART A: Dunlop Ltd, expects interest rates to increase. Rather than take a position in the bond market, Dunlop Ltd decides to use interest rate swaps to carry out the trade. Outline the position that Dunlop Ltd, with these expectations, should the company take in the interest rate swaps market? [2 marks]

PART B: The following table shows the borrowing capability of Firm X and Firm Y.

BORROWER	FIXED RATE (per annum)	VARIABLE RATE (per annum)
X	7.30%	BBSW + 0.55%
Y	9.90%	BBSW + 1.95%

Determine whether a profitable swap could be arranged. In your answer, calculate comparative advantages and show the net borrowing differential that may be gained and shared between Firm X and Firm Y. [3 marks]

PART C: There are two principal parties in a credit default swap: Name them and explain their roles. Illustrate your answer with an example. [2 marks]