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:

Display Rule

Cultural norms that dictate how and when emotions should be expressed in social situations.

Hedonic Treadmill

The theory suggesting that people tend to maintain a relatively stable level of happiness despite major positive or negative events or life changes.

Set Point

The weight maintained when the individual makes no effort to gain or lose weight.

Gratitude Journal

A personal record where individuals regularly document things for which they are grateful, often used to enhance well-being and happiness.