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