Principles of Finance · free preview
Interest Rate Risk
Firms manage interest rate risk on their floating-rate debt and refinancing exposures through swaps and futures, with the swap exchanging floating for fixed payments to stabilize the funding cost the capital structure lesson priced.
1. The exposure's sources
The exposure's sources
2. The swap mechanics
The swap mechanics
3. Futures and options on rates
Futures and options on rates
4. The hedged rate and the course's close
The hedged rate and the course's close
5. The two doors
Through which two doors does interest rate risk reach the firm?
6. The swap's exchange
In an interest rate swap, what exactly is exchanged?
7. The firm's net position
A firm pays floating on its debt and swaps to receive floating, pay fixed at 5 percent. Floating settles at 6 percent. What is the firm's all-in cost?
8. The swap's pricing at inception
How is the fixed rate on a new interest rate swap set?
9. The swaption's use
For what refinancing situation is a swaption, an option on a swap, the right instrument?
10. The hedged cost's flow
Where does the hedged funding cost flow in the firm's decision machinery?
11. The benchmark index's family
Swaps and floating loans reference floating benchmark rates like SOFR. What family of such benchmarks are they called? Answer with one word.
12. The rate fixer's name
What one-word term names the instrument that converts floating-rate debt to fixed through an exchange of payment streams? Answer in lowercase.
13. The asymmetric hedge's name
What one-word term names the option that caps the floating rate at a strike while preserving lower-rate benefits? Answer in lowercase.
14. The maturity wall's risk
What two-word term names the risk that upcoming debt maturities must be re-borrowed at unknown future rates? Answer in lowercase.
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