A public utility has a relatively low credit (BBB) rating. It would like to match its long- term assets with long-term,

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A public utility has a relatively low credit (BBB) rating. Itwould like to match its long-term assets with long-term, fixed-rate debt, but it findslong-term, fixed-rate funding expensive. An oil company has as a higher (AA) credit rating. Itcan issue fixed-rate debt at a low cost, but prefers to issue short-term commercial paper tofund its credit card receivables.The Treasurers of the two companies know one another and agree todo the swap without using a bank as an intermediaryThe public utility (BBB) can borrow in the bond market at 6.5% andcan obtain a floating-rate loan from its bank that reprices annually at SOFR+0.50%. (SOFR isthe Secured Overnight Financing Rate – the new benchmark interest rate for dollar-basedlending.) The oil company (AA) can issue bonds at 4.85% or issue A1/P1-ratedcommercial paper at 5 basis points below SOFOR (at SOFR – 0.05%).a) Set up a possible swap between these two firms. Show thepotential gains, if any, to each party from the swap. b) What are the risks, if any, to each party to this swap? (Bespecific.)