Twin Oaks Brewery (TOB) needs to borrow $20 million immediately. It can borrow for three years at a fixed rate of 7.5% or at a floating rate of LIBOR + 40 basis points.
Plain vanilla fixed-for-floating three-year swaps are priced at 7.3% fixed, in exchange for floating LIBOR. If TOB believes that interest rates are about to rise sharply, what should it do? If TOB believes that interest rates are about to decline sharply, what should it do?