Two companies have investments which pay the following rates of interest:
Firm A 6% Libor
Firm B 8% Libor+0.5%
Assume A prefers a fixed rate and B prefers a floating rate. Show how these two firms can both benefit by entering into a swap agreement. If an intermediary charges both parties equally a 0.1% fee and any benefits are spread equally between Firm A and Firm B, what rates could A and B receive on their preferred interest rate? Please draw the cash flow chart.
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