FRM I Practice Swap Question

[snowwoman]

Hello,
I am trying to solve below question on Swap, and not sure how to calculate the Floating Rate of this Swap, for each Firm. Any solution will be much appreciated. Thanks!

An oil driller recently issued USD 250 million of fixed-rate debt at 4.0% per annum to help fund a new project. It now wants to convert this debt to a floating-rate obligation using a swap. A swap desk analyst for a large investment bank that is a market maker in swaps has identified four firms interested in swapping their debt from floating-rate to fixed-rate. The following table quotes available loan rates for the oil driller and each firm, where Floating Rate is 6 month LIBOR:

Fixed-rate (in %)

Oil - 4.0

Firm A - 3.5

Firm B - 6.0

Firm C - 5.5

Firm D - 4.5

A swap between the oil driller and which firm offers the greatest possible combined benefit?

 

[mhy]

Isn't it just B because that would maximize the value of the fixed leg that the oil driller would be receiving?

 

[Le Van]

What mhy has said.

The combined benefit is the difference between fixed rate differential and floating rate differential, the latter of which is zero so you only need to pair the oil driller with whichever firm that is quoted the highest rate to maximize the gain to all parties.