A Ltd, a low-rated firm desires a fixed rate, long-term loan. It currently has access to floating interest rate funds at a margin of 1.5% over the Prime Rate. Its direct borrowing cost is 13% in the fixed-rate bond market. B Ltd which prefers a floating rate loan has access to fixed-rate funds in cedi-bond market at 11% and floating rate funds at Prime Rate + ½%. Explain how A Ltd and B Ltd can use swap to their advantage also Calculate how much Asaba Ltd would pay for its fixed-rate funds?

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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.