Problem
I. Imagine you are responsible for designing swaps at an investment bank. You find that CIBC can borrow over a 3 year period (in Euros (€)) at a fixed rate of 5.9 per cent per year paid annually or at Libor + 30 basis points. RBC can borrow at a fixed rate of 7.10 per cent per year paid annually or at Libor + 90 basis points.
Are there opportunities for a profitable plain vanilla interest rate swap between these two companies? What total apparent gains can be achieved from the swap, if any?
II. Your investment bank, acting as swaps market maker, requires a 10 basis points profit from any 3 year swap. What fixed rates would you have to offer each company in Part (I) above against Libor in a swap that appeared equally attractive to both companies? Detail the transactions and terms of the brokered swaps.