Suppose that on February 19, 2002, the treasurer for Company W wishes to restructure the coupon payments of one of her outstanding debt issues. The bond in question is scheduled to pay semiannual interest on February 19 and August 19 each year until February 19, 2007, and has a coupon rate of 5.50 percent with a face value of $35 million. On the same day, the treasurer for Company X wants to restructure the interest payments on his $50 million, four-year floating-rate note having its coupon reset each February 19 and August 19 to a reference rate of LIBOR flat. The maturity of this floating-rate bond is February 19, 2006.

a. Using the plain vanilla interest rate swap quotes in Exhibit 24.4, describe how both treasurers, working with a dealer, can use a swap agreement to alter synthetically their current cash flow obligations. Specifically, assume that Company W wishes to wind up with floating-rate exposure while Company X desires fixed-rate debt.

b. Assuming that the dealer negotiates these swap transactions simultaneously, will they represent a matched book? If not, describe two remaining sources of market exposure that the dealer still faces.