Suppose a swap bank can go long and short in three-year FRNs paying LIBOR and three-year T-notes yielding 5%.

a. Given these securities, define the three-year generic par value swap the bank could offer its customers. Exclude the basis point that the swap bank might add to its bid and ask prices.

b. Explain how the swap bank determines basis points to add to the fixed rate on its fixed and floating positions.

c. Suppose the swap bank provided one of its customers with a 5%/LIBOR fixed-rate position. Explain how the bank would hedge its position with the above securities if it did not have a customer taking an opposite swap position.

d. Suppose the swap bank provided one of its customers with a three-year, 5%/LIBOR floating-rate position. Explain how the bank would hedge its position with the above securities if it did not have a customer taking an opposite swap position.