1. Suppose a firm has sales that are highly correlated with economic conditions. Short-term interest rates are also pro-cyclical. However, the firm wants to avoid the possibility that lenders may refuse to renew loan agreements if circumstances for the firm change for the worse (i.e., firm want to lock in the availability of credit).
The firm will likely?
A. Issue LT debt and then enter into an IR swap in which it pays fixed and receives floating.
B. Issue ST debt and then enter into an IR swap in which it pays floating and receives fixed
C. Issue LT debt and then enter into an IR swap in which it pays floating and receives fixed
D. Issue ST debt and then enter into an IR swap in which it pays fixed and receives floating.
2. There is a foreign currency swap involving € and LIBOR-$. If you buy the foreign currency swap and then sell a dollar interest rate swap, you most entering into these swaps is to?
A. Transform ST $-denominated debt into ST €-denominated debt
B. Transform LT €-denominated debt into ST $-denominated debt
C. Transform ST €-denominated debt into LT $-denominated debt
D. Transform ST $-denominated debt into LT €-denominated debt
E. None of the above
3. The primary advantage to hedging with an option as opposed to a forward contract is
A. Better hedging of downside risk
B. Lower costs
C. Easier to understand
D. Better results when the currency moves in a favorable direction