One Derivative question

Question 1GlobalPetrol Corp, Exxon, and Shell want to borrow $500,000. GlobalPetrol Copr and Shell require a
variable rate loan to finance its business resources while Exxon requires a fixed rate to meet its
finance obligation rate. GlobalPetrol Copr, Exxon, and Shell have 5-year, 5-year, and 4-year of time
horizons respectively. Somatsu Investment offers to swap their interest rates while offering an
arbitrage opportunity to exploit their comparative advantage
Table: 1 Firms Interest Rates and Time Horizon
GlobalPetrol Corp
Exxon
Shell
Fixed
4%
5.2%
5.2%
Floating
L-0.1%
L+0.6%
L+0.6%
Cash Flow
$500,000
$500,000
$500,000
Time Horizon
5
5
4
Compute the net borrowing costs by designing a Vanilla interest rate swap for the correct parties in
which Somatsu Investment acts as an intermediary, taking 0.1% as a fee and the higher-rated firm
will share 70% of the swap benefit. (Refer Table 1)
(10 marks)