An Interest Rate Swap Can Effectively Be Hedged Against Interest

question 83

Multiple Choice

An interest rate swap can effectively be hedged against interest rate risk by:

• A) selling out to another party.
• B) entering into another swap agreement that has the opposite transactions to the first swap.
• C) setting floating-rate obligations equal to fixed-rate obligations.
• D) matching durations of assets and liabilities.

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Definitions:

Tender Offers

A public proposal by a person or company inviting shareholders to sell their shares at a specified price.

Greenmail

To avoid an unfriendly acquisition, a firm may buy shares owned by a potential acquirer at a price above the market price of the stock. The above-market payment is greenmail.

Horizontal Merger

A business consolidation that occurs between firms operating in the same industry, often aiming to increase market share.

Conglomerate Merger

A union between firms that are involved in totally unrelated business activities.