1) The one-year LIBOR rate is= 10% with annual compounding. Bank trades swaps where a fixed rate of interest is exchanged for 12-month LIBOR with payments being exchanged annually. 2- and 3-year swap rates (expressed with annual compounding) are 11% and 12% per annum. Evaluate the 2- and 3-year LIBOR zero rates.

2) Company A, British manufacturer, desires to borrow US dollars at the fixed rate of interest. Company B, a US multinational, desires to borrow sterling at the fixed rate of interest. They have been quoted given rates per annum):

Sterling US dollars Swap
Company A 11.0% 7.0% 4.0%
Company B 10.6% 6.2% 4.4%

Plan a swap which will net a bank, acting as intermediary, 10 basis points per annum and which will create a gain of 15 basis points per annum for each of 2 companies.

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