Suppose that two companies, Company A and Company B, both wish to borrow $100 million for 8 years. Due to their differences in credit rating, i.e., Company A has a AAA credit rating; Company B has a BBB credit rating, they have been offered the rates shown in the table below:

	Fixed	Floating
Company X	5.0%	6-month LIBOR +2%
Company Y	6.0%	6-month LIBOR + 4%

The needs arising from its operations obligate each company to choose a specific type of interest rate:

• Company X wants to borrow at a fixed rate of interest;
• Company Y wants to borrow at a floating rate of interest linked to 6-month LIBOR.

Ignore the need for financial institution for this question. Construct a swap that allows Company X to pay a fixed rate lower than the offered above and Company Y to pay a floating rate lower than the offered above.

Answer the following questions:

1. Is there an opportunity for a SWAP arrangement? Why?
2. If you answer Yes in part (1), propose a specific SWAP arrangement that provides equal savings to both companies.