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SCG and RMD both wish to invest $55 million in 5 years and have been offered the rates shown below. SCG wishes to invest at
SCG and RMD both wish to invest $55 million in 5 years and have been offered the rates shown below. SCG wishes to invest at a floating rate of interest, while RMD requires a fixed-rate investment.
Fixed Rate | Floating Rate | |
SCG | 2.8% | LIBOR -1.5% |
RMD | 3.6% | LIBOR +0.9% |
Design a vanilla swap that allocates 70% advantage (ie. gain) to RMD and 30% advantage (ie. gain) to SCG. Assume that a financial institution, acting as an intermediary, is planning to charge a 0.4% premium.
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