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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When a company has a floating-rate loan, its interest payments rise as market rates rise. The goal of hedging is to offset this exposure by gains on another instrument.
Option a: A forwards contract to receive a fixed rate would lock in fixed payments, but forwards on interest rates are typically used to hedge or speculate on the level of rates directly, not to convert a floating borrowing into a fixed payment stream in a standard corporate hedging context. This option is conceptually plausible but not the classic hedging approach for a floating-rate liability.
Option b: A futures contract to receive fixed payments would create a fixed income exposure, yet interest rate futures are standardized and typically used to hedge bond prices or expectations of rate moves, not to directly match the floating payments of a loan. The direction and cash-flow alignment are less straightforward for a floating-rate liability.
Option c: Enter an interest rate swap to pay fixed and receive floating. This is the textbook hedge for a floating-rate loan: by paying a fixed rate on the swap, the company effectively converts its floating-rate debt into a synthetic fixed-rate obligation, because the swap’s floating leg offsets rising loan payments while the fixed leg provides stability. This matches the hedging objective described.
Option d: Buy a call option on interest rates would give the right to benefit from rising rates, which is the opposite of the desired hedge for a floating-rate loan. It would be an asymmetric and more expensive hedge, and does not provide a direct cash-flow offset for the loan’s payments.
Option e: Enter a cross-currency swap is relevant when currency exposure is involved. Since the issue here concerns interest-rate risk on a domestic floating-rate loan rather than currency risk, a cross-currency swap is inappropriate for hedging this specific exposure.
In summary, the swap option (pay fixed, receive floating) directly targets the floating-payment exposure of the loan and provides a predictable fixed-cost profile, while the other instruments either do not align with the liability’s cash-flow needs or introduce misalignment between hedge and exposure.

FINS5512-Financial Markets & Institutions - T3 2025

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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类似问题

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:

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

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.

An interest rate swap involves:

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

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FINS5512-Financial Markets & Institutions - T3 2025

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

查看解析

登录即可查看完整答案

类似问题

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:

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

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.

An interest rate swap involves:

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

更多留学生实用工具

希望你的学习变得更简单

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.