you are given two risky bonds with the following specifications bond a 599237

You are given two risky bonds with the following specifications:Bond A

(a) Par: 100

(b) Currency: USD

(d) Maturity: 4 years

(e) Callable after 3 years

(f) Credit: AA–

Bond B

(a) Par: 100

(b) Currency: DEM

(d) Maturity: 5 years

(e) Credit: AAA

You will be asked to transform Bond A into Bond B by acquiring some proper derivative contracts. Use cash flow diagrams and be precise.

• Show how you would use a currency swap to switch into the right currency.

• Show how you would use an interest rate swap to switch to the needed interest rate.

• Is there a need for using a swaption contract? Can the same be accomplished using forward caps and floors?

• Finally, show two ways of using credit derivatives to switch to the desired credit quality.