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(a) Identify which company has a comparative advantage in fixed-rate borrowing, and in floating-rate borrowing, respectively.

(b) What are the cost savings for each company by using swap?

(c) What are the net costs of borrowing for ABC and XYZ by using swap?

(d) Design and show the swap with a diagram (hint: assume ABC pays the bank LIBOR and the bank pays XYZ LIBOR).

(e) Regarding the criticism of the comparative-advantage arguments of the swap contract, why the spread between fixed rates is greater than the spread between floating rates?

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