The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

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BlackTom AI · Accepted Answer

The question asks about a firm that currently has fixed-rate debt and expects interest rates to rise; what swap strategy should it pursue?
Option A: receive floating and pay fixed. This choice aligns with a hedging approach designed to mitigate the risk of rising rates by converting part of the fixed exposure into floating exposure. By receiving floating in the swap, the firm gains a payoff that increases when market rates rise, which helps offset the higher market rates that would otherwise make its fixed-rate debt relatively more expensive. Paying fixed in the swap matches the fixed debt obligation, creating a more balanced position as rates move higher.
Option B: pay floating and receive fixed. This would convert the firm’s exposure toward paying floating and receiving fixed, which tends to benefit when rates fall rather than rise. If rates rise, the firm would face higher floating payments without a corresponding strong offset, making this hedge less protective against rising rates for fixed-rate debt.
Option C: do nothing. If the firm expects rates to rise, remaining unhedged leaves it vulnerable to higher funding costs as market rates increase, while its fixed-rate debt remains fixed. This misses an opportunity to align the exposure with anticipated rate movements.
Option D: none of the above. This is a catch-all answer that would apply only if none of the listed strategies were appropriate. Given that a standard hedging approach for fixed-rate debt facing rising rates is to swap into a floating exposure, this option is not correct.
In summary, the strategy of receiving floating and paying fixed addresses the expectation of rising rates by introducing floating exposure to offset potential increases, while preserving the fixed payment obligation as needed. The other options either misalign with the rate outlook or fail to provide the protective hedge against rising rates.

The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

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The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to:

View Explanation

Log in for full answers

Similar Questions

GHI Industries has issued $180 million worth of long-term bonds at a fixed rate of 14%. GHI Industries then enters into an interest rate swap where it will pay LIBOR and receive a fixed 6% on a notional principal of $180 million. After all these transactions are considered, GHI's cost of funds is:

An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an:

Part 1Interest rate swaps have an advantage over options and futures in​ that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.

AIG Co. expects interest rates to rise over the next 12 months. To hedge its floating-rate loan, the company should:

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Lockheed wants 5-year floating rate debt in USD. 5-year IRS = 4%. SOFR = 4.15%. It could issue 5-year fixed rate at 4.5% or 5-year FRNs at SOFR + 1%. What should it do?

A swap that technically is a succession of forward contracts on interest rates is

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Part 1Interest rate swaps have an advantage over options and futures in that:Part 2 A. There is a large market for them. B. They can be written for a long time horizon. C. They are more liquid. D. They can limit interest rate risk.