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:

Gestational Surrogacy

Occurs when the sperm and the egg from the couple seeking surrogacy is fertilized through in vitro fertilization and implanted into the surrogate, making the child biologically related to both parents but not the surrogate.

Traditional Surrogacy

Occurs when the surrogate’s egg is fertilized by the father’s sperm, making the child biologically related to the father and the surrogate.

Artificial Insemination

A medical procedure that involves the deliberate insertion of sperm into a female's cervix or uterine cavity for the purpose of achieving pregnancy without sexual intercourse.

In Vitro Fertilization

A medical procedure where an egg is fertilized by sperm outside of the body, often used as a treatment for infertility.