Revenues are inversely correlated with interest rates

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Reference no: EM131525808

A construction company believes its revenues are inversely correlated with interest rates. It has regular fixed payments on loans, equipment leases, and employee compensation. It would like to enter a swap to hedge the interest rate risk associated with its revenue. Explain how a bank offering risk management services would determine the terms of a swap that would provide the desired results. You should describe in general terms what payments would be made on the swap when interest rates are high and when they are low, and what information the bank would need in order to set the terms of the swap. (You should consider e.g., how the bank can determine the degree of sensitivity of firm revenues to changes in interest rates, what payments made/received would be necessary in order to eliminate the interest rate-related risk, what expected future values would be needed to calculate the terms of the swap, and how those expected futures values might be determined.)

Reference no: EM131525808

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