The board of a company (Firm A) has agreed to pursue a new project and the Chief Financial Officer (CFO) determines that it may borrow:

• Floating at BBSW + 2.50%pa
• Fixed rate debt at 9.85%pa

The CFO of a large corporate (Firm B) learns that it may borrow:

• Floating at BBSW + 2.00%pa
• Fixed at 7.25%pa

Government debt is trading at 1.97%pa

Both CFOs happen to approach the same investment bank, you, to explore funding their requirements via a swap. You are willing to enter into an intermediated swap with both parties, on the condition that you make 0.10% from each party of the swap transaction.

Determine the swap strategy that ethically maximises the benefit of the swap for each party, including your investment bank.

1. Specify the swap cashflows
2. Calculate the borrowing costs and the benefit to each party from entering into the swap.