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Suppose banks A and B can borrow from the fixed interest-rate market at 5.75% and 4.25%, respectively, and from the floating interest-rate market at LIBOR+30bp
Suppose banks A and B can borrow from the fixed interest-rate market at 5.75% and 4.25%, respectively, and from the floating interest-rate market at LIBOR+30bp and LIBOR, respectively. Explain how the two banks can enter a Swap deal where both can reduce their borrowing rates assuming that both banks need to borrow from the market where they do not have a comparative advantage.
Suppose banks A and B can borrow from the fixed interest-rate market at 5.75% and 4.25%, respectively, and from the floating interest-rate market at LIBOR+30bp and LIBOR, respectively. Explain how the two banks can enter a Swap deal where both can reduce their borrowing rates assuming that both banks need to borrow from the market where they do not have a comparative advantage.
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