2. Companies X and Y have been offered the following rates per annum on a $5 million 10-year loan: Fixed Rate Floating Company X Company Y 5.1% LIBOR 6.4% LIBOR-0.3% Company X requires a floating-rate loan; company Y requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and will appear equally attractive to X and Y.

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A: The Answer :

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A:

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A: Compound interest.

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A:

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Swaps

A swap is a derivative contract in which two parties are agreed to exchange their cash flows from two different financial instruments for a defined period. In swap contracts, cash flows from one financial instrument are fixed and cash flow from other financial instruments is variable based on the interest rate, exchange rate, and commodity price. Swap contracts are transacted in an over-the-counter system. Swap contracts are utilized to hedge risk and mitigate loss.