That is, the Swap bank provides two firms with LIBOR rate only. If Firm A gains 0.50% from this swap, figure out the ask price for LIBOR. What are the gains for the Swap Bank and Firm B, respectively?

Here’s a table showing the available borrowing opportunities for 2 firms.

Two firms are provided with LIBOR rates by the Swap bank: Firm A and Firm. For Firm A to receive 0.50%, the swap’s ask price is LIBOR 1.00%. Swap Bank will receive a variable rate, based on LIBOR of one of the firms for the same time. This is 1.00%.

Swap Bank receives a 0.50% return on its investment. Based on the Swap Bank’s new LIBOR-based interest rate, the gains Firm B will see after the arrangement is completed (less any fees). For example, if Firm B’s current interest rate was higher than 1.00%, then it would have a net loss by entering into this transaction due to having to pay more than they were already paying as well as any additional fees associated with swapping rates through the bank. However, it might be able benefit from an overall lower cost of borrowing after this transaction (again, without any applicable fees).

Overall, by engaging in this type of swap agreement via a Swap Bank rather than independently between two parties can offer some benefits such as enabling access to better market pricing and liquidity among other potential advantages depending on each party’s needs and intentions when setting up swaps like these.

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