AN OIL DRILLER RECENTLY ISSUED USD 250 MILLION OF FIXED-RATE DEBT...
21.
An oil driller recently issued USD 250 million of fixed-rate debt at 4.0% per annum to help fund a new project.
It now wants to convert this debt to a floating-rate obligation using a swap. A swap desk analyst for a large
investment bank that is a market maker in swaps has identified four firms interested in swapping their debt
from floating-rate to fixed-rate. The following table quotes available loan rates for the oil driller and each firm:
Firm
Fixed-rate (in %)
Floating-rate (in %)
Oil driller
4.0
6-month LIBOR + 1.5
Firm A
3.5
6-month LIBOR + 1.0
Firm B
6.0
6-month LIBOR + 3.0
Firm C
5.5
6-month LIBOR + 2.0
Firm D
4.5
6-month LIBOR + 2.5
A swap between the oil driller and which firm offers the greatest possible combined benefit?
a.
Firm A
b.
Firm B
c.
Firm C
d.
Firm D