Question
Two parties wish to enter into a swap to take advantage of the other partys comparative advantage and approach you, an investment bank. Party A
Two parties wish to enter into a swap to take advantage of the other partys comparative advantage and approach you, an investment bank.
Party A wishes to borrow at a fixed rate, but if it went into the market, it could borrow fixed at 12.95%. However, if it borrowed floating, it could borrow at BBSW + 2.75%
Party B wishes to borrow floating, and if it did so, it could borrow at BBSW + 1.35%. However, if it borrowed fixed, it could borrow at 9.55%
The investment bank charges 0.30% on each leg of the swap
Describe the transaction which will maximise the benefit for all parties
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