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.

Question

Quizplus · Accepted Answer

KKR is exposed to interest rate increases because as LIBOR increases, the interest payments on the note will also increase. Therefore, a short hedge can be used to protect against the risk of rising interest rates by buying put options, which offer the right to sell the note at a fixed price if interest rates rise. This will limit KKR's losses if interest rates do increase.

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