A Company Enters into an Interest Rate Swap in Order

question 67

Multiple Choice

A company enters into an interest rate swap in order to hedge a $5,000,000 variable-rate loan.The loan is expected to be fully repaid this year on June 10.The contract requires that if the interest rate on April 30 of next year is greater than 11%,the company receives the difference on a principal amount of $5,000,000.Alternatively,if the interest rate is less than 11%,the company must pay the difference.Which of the following statements is correct regarding this contract?

• A) The swap agreement effectively hedges the variable interest payments.
• B) The timing of the swap payment matches the timing of the interest payments and,therefore,the variable interest payments are hedged.
• C) The timing of the swap payment does not match the timing of the interest payments and,therefore,the variable interest payments are not hedged.
• D) This swap represents a fair value hedge.

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Definitions:

Hormone

A chemical messenger, often produced in one region of the body of a multicellular organism and transported to another region where it signals cells to alter some aspect of growth, development, or metabolism.

Tyrosine Kinase Receptors

A type of enzyme-linked receptor on cell surfaces that phosphorylates tyrosine residues on target proteins, playing key roles in cell signaling.

Protein Kinase Cascade

A series of protein kinases that sequentially phosphorylate and activate each other, leading to the amplification of a cellular signal.

Dimer

A molecular complex formed by two, usually identical, molecules joined together.