AIG Co. expects interest rates to rise over the next 12 months. To hedge its floating-rate loan, the company should:

Question

BlackTom AI · Accepted Answer

When a company has a floating-rate loan, its interest payments rise as market rates rise. The goal of hedging is to offset this exposure by gains on another instrument.
Option a: A forwards contract to receive a fixed rate would lock in fixed payments, but forwards on interest rates are typically used to hedge or speculate on the level of rates directly, not to convert a floating borrowing into a fixed payment stream in a standard corporate hedging context. This option is conceptually plausible but not the classic hedging approach for a floating-rate liability.
Option b: A futures contract to receive fixed payments would create a fixed income exposure, yet interest rate futures are standardized and typically used to hedge bond prices or expectations of rate moves, not to directly match the floating payments of a loan. The direction and cash-flow alignment are less straightforward for a floating-rate liability.
Option c: Enter an interest rate swap to pay fixed and receive floating. This is the textbook hedge for a floating-rate loan: by paying a fixed rate on the swap, the company effectively converts its floating-rate debt into a synthetic fixed-rate obligation, because the swap’s floating leg offsets rising loan payments while the fixed leg provides stability. This matches the hedging objective described.
Option d: Buy a call option on interest rates would give the right to benefit from rising rates, which is the opposite of the desired hedge for a floating-rate loan. It would be an asymmetric and more expensive hedge, and does not provide a direct cash-flow offset for the loan’s payments.
Option e: Enter a cross-currency swap is relevant when currency exposure is involved. Since the issue here concerns interest-rate risk on a domestic floating-rate loan rather than currency risk, a cross-currency swap is inappropriate for hedging this specific exposure.
In summary, the swap option (pay fixed, receive floating) directly targets the floating-payment exposure of the loan and provides a predictable fixed-cost profile, while the other instruments either do not align with the liability’s cash-flow needs or introduce misalignment between hedge and exposure.

AIG Co. expects interest rates to rise over the next 12 months. To hedge its floating-rate loan, the company should:单项选择题

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