TBS plans to borrow 100 million Canadian Dollars and CFT wants to borrow 80 million US Dollars. They face the following interest rates:

	US Dollars	Canadian Dollars
TBS	3.2%	5.4%
CFT	5.3%	6.2%

Current exchange rate is 1.25 Canadian Dollars per US Dollar. Assume that a bank acts as the intermediary to arrange the swap and requires a 30-basis-point spread as the commission. The swap is equally attractive and beneficial to TBS and CFT.

a) Design an optimal currency swap agreement between TBS and CFT for their borrowing and describe how it works. Draw a flow chart to show how the swap operates. b) Discuss how the bank can avoid foreign exchange risk as the intermediary for this swap agreement.