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Two firms have gotten quotes for fixed rate and variable rate loans, which are shown in the table below. Floating Fixed Firm A 7.5%
Two firms have gotten quotes for fixed rate and variable rate loans, which are shown in the table below. Floating Fixed Firm A 7.5% Libor +3% Firm B 3% Libor + 1.5% Design a swap contract that has Firm A effectively paying a fixed rate, Firm B effectively paying a variable rate, has a financial intermediary earning a 0.4% fee, and splits the remaining surplus between the firms equally. Show that each party to the swap earns or pays the percentage that it should under the swap agreement. (There's extra space for your solution on the next page if you
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