- 5 Marks
FM – L2 – Q89 – Treasury Management
Explain how NorthStar Enterprises can use an interest rate swap to hedge a variable rate loan and calculate the effective borrowing rate.
Question
A company, NorthStar Enterprises, has an outstanding 10-year variable rate loan of $15 million on which it is paying SOFRA + 2%. It wishes to eliminate its exposure to a rise in variable interest rates. Currently, 10-year US interest rate swaps are quoted at 4.458%.
Required:
Explain how the treasury function could use an interest rate swap to hedge interest rate risk and calculate the effective borrowing rate that would result.
Find Related Questions by Tags, levels, etc.
- Tags: Hedging, Interest Rate Risk, Interest Rate Swap, SOFRA, Treasury management
- Level: Level 2
- Topic: Treasury Management
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