Finance School of Management Relative advantages and risk allocation Interest Rate SWAP Firms with deferring degrees of credit have different costs of fir nanci g AAA Corp BBB Corp Floating rate LIBOR +10 basis LIBOR+50 basis Fixed rate 11%0 12%0 LIBOR: London Interbank Offered Rate Basis: 0.01% The aaa corporation has the relative advantage of financing at the fixed rate while the bbb corporation has the relative advantage of financing at the floating rate However, bbb may want to finance at a fixed rate and aaa may prefer a floating one How can we do? uesTc20 Finance School of Management Relative Advantages and Risk Allocation: Interest Rate SWAP ❖ Firms with deferring degrees of credit have different costs of financing. ❖ The AAA corporation has the relative advantage of financing at the fixed rate, while the BBB corporation has the relative advantage of financing at the floating rate. ❖ However, BBB may want to finance at a fixed rate and AAA may prefer a floating one. ❖ How can we do? LIBOR：London Interbank Offered Rate Basis：0.01%