An interest rate swap to synthetically convert floating rate debt into fixed rate debt would:
A)Represent a cash flow hedge.
B)Represent a fair value hedge.
C)Represent a foreign currency hedge.
D)Not qualify as a hedge.

Question

Quizplus · Accepted Answer

An interest rate swap is a common tool used to hedge interest rate risk. By converting floating rate debt into fixed rate debt, the company is synthetically creating a fixed rate liability, which can be covered with a fixed rate interest rate swap. This would be considered a cash flow hedge, as the company is hedging against the variability of cash flows due to changes in interest rates.

An Interest Rate Swap to Synthetically Convert Floating Rate Debt