If a company expects interest rates to increase,which of the following strategies should the company consider?
A) A short interest rate call
B) A swap involving paying fixed rate and receiving floating rate
C) A short forward rate agreement
D) All of the given choices

Question

Quizplus · Accepted Answer

If a company expects interest rates to increase, it should consider a swap involving paying a fixed rate and receiving a floating rate. In this case, the company can protect itself from the interest rate risk by agreeing to pay a fixed rate on a stream of cash flows and receiving a floating rate on the same amount of cash flows. This is because when interest rates go up, the floating rate will increase, which will help offset the loss from having to pay the fixed rate. Short interest rate calls and short forward rate agreements are strategies for those who expect interest rates to decrease, so they are not appropriate in this situation.

If a Company Expects Interest Rates to Increase,which of the Following