The followings are the financing rates of Firm A and B in the fixed-rate and floating rate markets: Firm A Firm B Fixed-rate 5.10% 6.30% Floating rate LIBOR+0.30% LIBOR+2.90% Because of the nature of their business, Firm A would need to secure effectively fixed-rate financing, while Firm B to secure effectively floating-rate financing. (a) What is the size of the market anomaly? Construct an interest rate swap between Firm A and Firm B such that the savings in financing costs will be equally split between the two firms. What are the effective financing costs for Firm A and Firm B, respectively, after entering into the swap? (b) Now, suppose there is a financial institution that serves as the intermediary in setting up an interest rate swap between Firm A and Firm B. The financial institution requires at least 0.20% as fees in the setting up the swap. What is the range of value of X in the following swap arrangement that will ensure there are incentives for all the parties (Firm A, Firm B, and the financial institution) to involve? Give your answer to the nearest 0.01%. Note that the financial institution will not be interested if it cannot secure a net cash flow of at least 0.20% (as fees). LIBOR+X% LIBOR+1.5% Firm B Financial Institution Firm A 5% (5+X)%