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Suppose Bank A is willing to allow you to enter into either side of a 3-year swap agreement where LIBOR is exchanged for a fixed 8% interest. At the same time, Bank B is willing to lend you money for 3-years and charge you LIBOR+.5% each year in interest. Alternatively, Bank B is willing to allow you to deposit your money in the bank and earn an annual interest payment each year of LIBOR-.5%. Finally, Bank C is willing to lend you money (let you deposit your money) and pay (earn) a fixed 7% interest for the next 3-years. Is there an arbitrage opportunity here? What is it?

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Financial Management, Finance

Category:- Financial Management
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