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CMC Co has a comparative advantage in borrowing at the fixed rate and the counterparty has a comparative advantage in borrowing at the floating rate. Total possible benefit before Pecunia Bank's fee is 1·2%, which if shared equally results in a benefit of 0·6% each, for both CMC Co and the counterparty.
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After paying the 20 basis point fee, CMC Co will effectively pay interest at the yield curve rate and benefit by 40 basis points or 0·4%, and the counterparty will pay interest at 3·4% and benefit by 40 basis points or 0·4% as well.
[Note:Full marks will be given where the question is answered by estimating the arbitrage gain of 1·2% and deducting the fees of 0·4%, without constructing the above table]
