KKR issues a $10 million 18-month floating rate note priced at LIBOR plus 400 basis points.What is KKR's interest rate risk exposure and how can it be hedged?
A)KKR is exposed to interest rate increases; short hedge by buying put options.
B)KKR is exposed to interest rate increases; long hedge by buying call options.
C)KKR is exposed to interest rate decreases; long hedge by buying call options.
D)KKR is exposed to interest rate decreases; short hedge by buying put options.
E)KKR is exposed to interest rate increases; short hedge by buying call options.

Question

Quizplus · Accepted Answer

KKR is exposed to interest rate increases as the interest rate on the note is based on the LIBOR rate, which can fluctuate. To hedge this risk, KKR can use a short hedge by buying put options, which would give them the option to sell the note at a predetermined price, protecting them against a drop in value caused by rising interest rates.

KKR Issues a $10 Million 18-Month Floating Rate Note Priced