Question details

Two firms X and Y are able to borrow funds as follows:
$ 5.00

Two firms X and Y are able to borrow funds as follows:

(a) Fixed-rate funding at 4% and floating rate at Libor−1%. (b) Fixed-rate funding at 6% and floating rate at Libor+1%.

Show how these two firms can both obtain cheaper financing using a swap. What swap would you suggest to the two firms if you were unbiased advisor? 

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