AB Swap Bank Outside Lender X Outside Lender Y FixedFloating A8%LIBOR B9%LIBOR + ½ QSD = 1% – ½% = ½% Step 1: A is better at borrowing fixed; B is better at borrowing floating so have them borrow externally according to their comparative advantage Step 2: We are to quote the swap against flat LIBOR 8% (Step 1) LIBOR + ½ (Step 1) LIBOR (Step 2) LIBOR (Step 2) Step 3: The QSD = ½ so we have 50 bp to distribute among 3 players.
{}