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

question 106

Multiple Choice

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.
• E)KKR is exposed to interest rate increases; short hedge by buying call options.

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Definitions:

Interest on Interest

The concept of earning interest on previously earned interest, contributing to compound growth.

Compounded Annually

Interest calculation method where the interest is added to the principal at the end of each year, and the total becomes the principal for the next year.

Company Expansion

The process of a company increasing its size, operations, or market presence, often through investment, acquisitions, or increasing its customer base.

Compounded Monthly

The process of calculating interest on both the initial principal and the accumulated interest of previous periods on a monthly basis.