Smith Brothers has a ﬂoating-rate loan based on the LIBOR rate. The Three Sisters has a ﬂoating- rate loan based on the Treasury bill. The Smith Brothers would prefer a loan based on the T-bill and
The Three Sisters would prefer a loan based on LIBOR, but neither have been able to obtain the
Loan they prefer. These two ﬁrms would most likely beneﬁt if they entered a(n):

Question

Quizplus · Accepted Answer

An interest rate swap would allow Smith Brothers and The Three Sisters to exchange their current floating-rate loans for the opposite of what they currently have, based on their preferences. This would benefit both firms by allowing them to have loans based on the rates they prefer. The other options listed, such as a forward contract on the dollar-pound exchange rate, commodity swap, exchange rate swap, or futures contract on the dollar-pound exchange rate, do not address the specific issue of mismatching loan preferences.

Smith Brothers Has a ﬂOating-Rate Loan Based on the LIBOR