15. NorthRock Investments is an asset manager that invests primarily in floatingrate debt. The size of their bond portfolio is $700 million. NorthRock believesthat inflation has peaked, which will cause interest rates to fall over the medium-term. They decided to hedge against this risk by entering into a swap based on1-month LIBOR on 1 September 2022. The details of the swap are as follows:Swap Fixed Rate3.80%Date2022/09/202022/10/20301-Month Libor(%)2.782.31What swap must NorthRock enter into to hedge its position and what will beNorthRock's first cash flow?4A) Pay fixed, receive 1-m LIBOR swap. $595 000 paymentB) Pay fixed, receive 1-m LIBOR swap. $869 167 paymentC) Pay 1-m Libor, receive fixed, $595 000 receiptD) Pay 1-m Libor, receive fixed., $869 167 receiptE) Pay fixed, receive 1-m LIBOR swap. $1 621 667 payment

North Rock receives floating rate interest on its investments. To hedge this risk, they need to…

Answered: What swap must NorthRock enter into to…

Business

Finance

What swap must NorthRock enter into to hedge its position and what will be NorthRock's first cash flow? 4

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

15. NorthRock Investments is an asset manager that invests primarily in floating
rate debt. The size of their bond portfolio is $700 million. NorthRock believes
that inflation has peaked, which will cause interest rates to fall over the medium-
term. They decided to hedge against this risk by entering into a swap based on
1-month LIBOR on 1 September 2022. The details of the swap are as follows:
Swap Fixed Rate
3.80%
Date
2022/09/20
2022/10/20
30
1-Month Libor
(%)
2.78
2.31
What swap must NorthRock enter into to hedge its position and what will be
NorthRock's first cash flow?
4
A) Pay fixed, receive 1-m LIBOR swap. $595 000 payment
B) Pay fixed, receive 1-m LIBOR swap. $869 167 payment
C) Pay 1-m Libor, receive fixed, $595 000 receipt
D) Pay 1-m Libor, receive fixed., $869 167 receipt
E) Pay fixed, receive 1-m LIBOR swap. $1 621 667 payment

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