Hedge the firm from interest rate risk

Reference no: EM1345248

Consider a finance company with the following type of business. The firm provides small corporations with short-term loans (under 6 months maturity). These loans are made at LIBOR plus 3 percent. The firm raises money primarily by selling 30 year fixed-rate bonds.

(a) When interest rates increase, what happens to the cash flows of the firm?

(b) What type of swap position would hedge the firm from interest rate risk?

Reference no: EM1345248

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