a. murray\'s can borrow money at a fixed rate of 10.5% or a variable rate set at

Question

a. murray's can borrow money at a fixed rate of 10.5% or a variable rate set at prime plus 2.5%, Fred's can borrow money at a variable rate of prime plus 1.5% or a fixed rate of 12%. murray's prefers a variable rate and Fred's prefers a fixed rate. The swap dealer will take a 1.5% profit. Specify what rate each party will pay and receive from the dealer and how the dealer will lock in their profit. Murray: Pay Receive Savings Fred: Pay Receive Savings Dealer: Pay to Murray Receive From Murray Profit Pay to Fred Receive from Fred Profit

Explanation / Answer

Without Swap With Swap Murray = Prime +2.5% 10.50% Fred = 12% Prime+1.5% Prime + 14.5% Prime + 12% Overall Gain due to Swap = 2.50% Gain to Swap dealer = 1.50% Gainto Murray = 0.50% Gain to Fred = 0.50% Murray willpay = Prime +2.5% - .05% Prime + 2% Fred willpay = 12%-0.5% 11.50%

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