Question 4. [3 marks]

Two companies have investments which pay the following rates of interest:

	Fixed	Float
Firm A	6%	Libor
Firm B	8%	Libor+0.5%

Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? (2 marks) Please draw the cash flow chart. (1 marks)