Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase.Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease.The two companies agree to exchange cash flows.Such an arrangement is called:
A)a futures contract.
B)a forward contract.
C)a swap.
D)an option.

Question

Quizplus · Accepted Answer

This is an example of a swap agreement where two parties agree to exchange cash flows based on different variables. In this case, Company X is looking for fixed rates and Company Y is looking for variable rates. A swap allows them to achieve their desired interest rate structures. A futures contract, forward contract, and option contracts are all different types of financial contracts that do not involve the exchange of cash flows but rather agreements to buy or sell an underlying asset or instrument at a future date.

Company X Issues Variable-Rate Debt but Wishes to Fix Its