Explain How a Firm Could Use a Swap to Hedge

question 35

Essay

Explain how a firm could use a swap to hedge its interest rate exposure under a two-year bill facility, and demonstrate how the swap determines its effective interest rate for the first two quarters of the facility, assuming that it commences in June and the swap rate is 6%.Assume further that 90-day BBSW is 5.45% in June and 5.55% in September, and that the swap periods are 90 days.

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Definitions:

Oversecretion

The production and release of excess amounts of bodily substances, often hormones, compared to normal levels.

Insulin

A substance created in the pancreas that controls blood sugar levels.

Adrenal Glands

Small, triangular glands located on top of both kidneys that produce hormones such as adrenaline and cortisol, which play key roles in the body's response to stress.

Stress

A physical, chemical, or emotional factor that causes bodily or mental tension and may be a factor in disease causation.