Company Oscar is borrowing at a variable/floating rate of LIBOR +1% p.a.; but would like to borrow at a fixed rate. Oscar is able to borrow fixed at 4% p.a. Company Papa is borrowing at a fixed rate of 5% p.a.; but would like to borrow at a variable/floating rate. Papa is able to borrow at a variable/ floating rate of LIBOR +2.6% p.a.
What can we deduce about the interest rate expectations of the two companies? Show how the companies could structure a plain interest rate swap to so that each has its preferred type of borrowing, each at a lower rate than it would face alone, and with the overall benefit of the swap being shared two thirds to company Oscar, and one third to company Papa. Ignore transactions costs in your calculations; but explain (without the need for further calculations) the impact that transactions costs would have
