Suppose we have 2 companies: Trust and Finance. Trust agrees to pay Finance a fixed rate of
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Suppose we have 2 companies: Trust and Finance. Trust agrees to pay Finance a fixed rate of 7% on $1 million of notional principal for the next 10 years, and Finance agrees to pay Trust the one year treasury bill rate plus 1% on the $1 million of notional principal for the same period?
Suppose further that Trust has $1 million less rate sensitive assets than it has rate sensitive liabilities, while Finance has $1million more rate sensitive assets than rate sensitive liabilities:
a. If interest rates rise unexpectedly, how would Trust hedge against the interest rate risk?
b. If interest rates fall suddenly, how would Finance hedge against the interest rate risk?
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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