Companies A and B wish to borrow £40 million for a period of 7 years

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Companies A and B wish to borrow £40 million for a period of 7 years. The following table summarises the interest rates of the deals offered to each company: Company Fixed Floating A 3.7% LIBOR+1% B 6.2% LIBOR+2% Company A would like to borrow at floating interest rate while company B would like to borrow at fixed rate. A financial institution has offered to design a swap deal and it charges 0.3% for that service. Answer the following questions: a. Explain the comparative advantage position for both companies. (5 marks) b. Explain how the swap deal would work if the comparative advantage is shared equally between both parties. (10 marks) c. Briefly describe how a Credit Default Swap works and its implications during the financial crisis. (10 marks)