Financial Risk Manager Part 1
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A company specializing in oil drilling has recently issued $250 million in fixed-rate debt with an annual interest rate of 4.0% to fund a new project. Now, the company intends to convert this fixed-rate debt into a floating-rate debt using a swap agreement. A swap desk analyst from a leading investment bank, known for being a market maker in swaps, has identified four potential companies interested in swapping their floating-rate debt for fixed-rate debt. The following table presents the loan interest rates for the oil drilling company and each of the prospective companies:
| Company | Fixed-rate (in %) | Floating-rate (in %) |
|---|---|---|
| Oil Drilling Company | 4.0 | 6-month LIBOR + 1.5 |
| Company A | 3.5 | 6-month LIBOR + 1.0 |
| Company B | 6.0 | 6-month LIBOR + 3.0 |
| Company C | 5.5 | 6-month LIBOR + 2.0 |
| Company D | 4.5 | 6-month LIBOR + 2.5 |
Identify which company the oil drilling company should engage in a swap with in order to attain the maximum combined benefit.