Question
The Miller Company and the Edwards Company both need to raise $1 million to fund improvements at their manufacturing plants. Miller has been in business
The Miller Company and the Edwards Company both need to raise $1 million to fund improvements at their manufacturing plants. Miller has been in business for 40 years and has a very good credit rating. It can borrow at either a fixed rate of 10% or at a floating rate based on the LlBOR+3%. The Edwards Company has experienced some financial distress recently and does not have a strong credit history. It can borrow at either a fixed rate of 15% or at a floating rate based on the LlBOR+2%. Miller believes that the general level of interest rates will fall in upcoming years and therefore would prefer to borrow at a floating rate of interest. Due to its financial difficulties, Edwards would prefer to borrow at a fixed rate of interest so that unexpected increases in the general level of interest rates will not force the firm into bankruptcy. a) Is there an opportunity for the Miller Company and the Edwards Company to benefits from a swap! b) Show how you would structure a swap between the two parties.
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