Answer: Firm C

The oil driller is looking to convert its fixed-rate debt to a floating-rate obligation through a swap. The benefit of the swap for the oil driller is determined by the difference between the fixed rate it is paying and the fixed rate it would receive from the swap, as well as the difference between the floating rate it would pay in the swap and the floating rate it is currently paying. The table provided shows the fixed and floating rates for the oil driller and four other firms. To find the greatest combined benefit, we compare the fixed spread (the difference between the oil driller's fixed rate and the other firm's fixed rate) and the floating spread (the difference between the oil driller's floating rate and the other firm's floating rate). For Firm A, the fixed spread is -0.5% (4.0% - 3.5%) and the floating spread is -0.5% (1.5% - 1.0%), resulting in no benefit. For Firm B, the fixed spread is -2.0% (4.0% - 6.0%) and the floating spread is 0.5% (1.5% - 3.0%), resulting in a net benefit of -1.5%. For Firm C, the fixed spread is -1.5% (4.0% - 5.5%) and the floating spread is -1.5% (1.5% - 2.0%), resulting in a net benefit of 0%. For Firm D, the fixed spread is 0% (4.0% - 4.5%) and the floating spread is -0.5% (1.5% - 2.5%), resulting in a net benefit of -0.5%. The greatest combined benefit for the oil driller comes from Firm C, where the net benefit is 0%, meaning there is no loss in the swap, and the oil driller can successfully convert its fixed-rate debt to a floating-rate obligation without any additional cost.

Author: LeetQuiz Editorial Team