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Comparative advantage and the QSD

It is comparativeadvantage, not absolute advantage, that makes a swap pay, and a dealer's spread splits the gain three ways. Set each firm's cost in both markets. The quality spread differential QSD = |fixed gap − floating gap| is the total gain available, and it is shared by Firm A, Firm B, and the dealer.

Fixed gap (B − A) = 7.00% − 5.00% = 200 bp
Floating gap (B − A) = 50 bp vs 100 bp = 50 bp
QSD = |200 bp − 50 bp| = 150 bp
A 50 bpB 50 bpDealer 50 bp
Identity: A + B + dealer = 50 bp + 50 bp + 50 bp = 150 bp = QSD ✓
borrows fixedborrows floatingA pays fixedgets floatB pays floatgets fixedFirm Aends floatingDealerbid-offerFirm Bends fixedfixedfloating
A has its comparative advantage in fixed and borrows there at 5.00%. B borrows floating at BBSW + 100 bp. They swap through the dealer so A ends up floating and B ends up fixed.
QSD (total gain)150 bp
Firm A is cheaper in BOTH markets (absolute advantage)
A saving 50 bpB saving 50 bpDealer spread 50 bp
All-in cost vs borrowing direct
A wants floatingBBSW + 50 bp → BBSW + 0 bp
B wants fixed7.00% → 6.50%
A fixed cost5.00%
A floating spread over BBSWBBSW + 50 bp
B fixed cost7.00%
B floating spread over BBSWBBSW + 100 bp
Dealer bid-offer spread50 bp
A's share of the firms' gain50%
Try this

Discuss.Load "Classic QSD" and confirm Firm A is cheaper in both markets yet the swap still pays. Why does absolute advantage not matter? Now drag B's floating spread until both gaps are equal and the QSD collapses to zero. If real capital markets are efficient, should a persistent QSD survive arbitrage (Hull 2022, §7.4)?

Convention: floating quoted as BBSW + spread (bp). Total gain QSD = |fixed gap − floating gap|. The dealer spread is capped at the QSD; A and B split the remainder, so A + B + dealer = QSD exactly. Per-annum rates, notional and tenor aside. Illustrative split; the real division is negotiated.

Comparative Advantage in SwapsOpen in Dr Phil's Quant Lab ↗