1. Firm XYZ enters into an interest rate swap with a dealer in which it pays a floating rate of LIBOR on a notional amount of $50,000,000 with semiannual payments based on 30-day months and a 360-day year. In turn, it will receive a semiannual payment based on the same $50,000,000 notional amount and 30-day months and 365-day years but calculated using a fixed rate of 4.5 percent. Suppose that the LIBOR rate is 4.0% at the beginning of the swap. The net payment to firm XYZ at the first settlement six months into the swap would be:
$102,740
$104,452
$106,164
$107,877
$109,589
2. Suppose firm ABC has access to fixed rate 7.5%, and floating rate of Euribor + 1.0%, while XYZ had access to fixed rate 6% and floating rate Euribor + 0.5%. For these two firms:
ABC has a comparative advantage in fixed while XYZ has a comparative advantage in floating rates.
XYZ has a comparative advantage in fixed while ABC has a comparative advantage in floating rates.
Only XYZ has a comparative advantage, and it is both in fixed and in floating rates.
Neither firm has a comparative advantage.