The Advantage of Hedging an Interest Rate Exposure with Interest

question 46

Multiple Choice

The advantage of hedging an interest rate exposure with interest rate options is:

• A)a lower forward rate is 'locked-in'
• B)a higher forward rate is 'locked-in'
• C)they have a lower cost than futures
• D)the benefit of a favourable rate movement is not forgone.
• E)None of these.

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Definitions:

EBIT

Profit measurement called Earnings Before Interest and Taxes, which encompasses all of a business's expenditures apart from interest and taxes.

Tax Rate

The portion of financial income that lawmakers decree as taxable for corporations or individuals.

Dividends Paid

The portion of a company's earnings distributed to shareholders, typically expressed as a dollar amount per share.

Fixed Assets

Long-term tangible assets held for business use and not expected to be converted to cash in the upcoming fiscal year.