Stetson use an interest rate swap

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Reference no: EM131177431

As a manager of Stetson Bank, you are responsible for hedging Stetson’s interest rate risk. Stetson has forecasted its cost of funds as follows: Year Cost of Funds 1 6% 2 5% 3 7% 4 9% 5 7% It expects to earn an average rate of 11 percent on some assets that charge a fixed interest rate over the next five years. It considers engaging in an interest rate swap in which it would swap fixed payments of 10 percent in exchange for variable-rate payments of LIBOR + 1 percent. Assume LIBOR is expected to be consistently 1 percent above Stetson’s cost of funds. Determine the spread that would be earned each year if Stetson uses an interest rate swap to hedge all of its interest rate risk. Would you recommend that Stetson use an interest rate swap?

Reference no: EM131177431

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