Final answer:
An interest rate swap can be designed where a US company with a fixed rate dollar loan can swap for a sterling floating rate with the help of a UK company looking for a dollar fixed rate loan. This swap arrangement takes advantage of the different interest rates and borrowing capacities of each company to provide a benefit to both parties involved. The investment bank acts as an intermediary and charges a fee for the swap facilitation.
Step-by-step explanation:
The scenario presented involves a company that wants to swap its fixed rate loan for a floating rate loan through an investment bank. To design an equitable swap transaction for both companies involved, one must understand how interest rate swaps work and the benefits that can be derived from them. A US company with a 750 million loan at a 6% fixed rate wants to swap to a 180 days sterling floating rate. The investment bank charges a 20 basis points fee. The US company could borrow in sterling at 4.5%, and the UK company could borrow in dollars at 7.50%. An interest rate swap could be structured where the US company pays sterling based on the floating rate and the UK company pays the dollar fixed rate, both benefiting from the comparative advantage each has in their respective borrowing markets. An intermediary bank facilitates this swap and ensures that both parties meet their obligations.