Two companies Aqua and Blue have been offered the following rates on $30 million 6-year loan. Aqua requires a floating rate loan and Blue requires a fixed rate loan.

Fixed Rate Floating Rate

Aqua Co. 5% LIBOR+0.1%

Blue Co. 6.4% LIBOR+.6%

Required:

a) What are the comparative-advantages and total gains that Aqua and Blue could attain if they engaged in a swap contract?

b) Design a swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally attractive to Aqua and Blue