This is the reading on risk management applications of swap strategies, blue box example 4. [question removed by moderator] Answer says: the company would enter into a swap in which it pays LIBOR and receives a fixed rate of 7% on notional principal of $30m. If we have issued a floating rate note, and bought a fixed rate bond, we are pay floating, receive fixed. So to manage the risk, why does the answer say we would want to pay LIBOR (floating) and receive fixed? Don’t we want the opposite of our position, so we should go receive LIBOR and pay fixed?

The payment equation would look something like that :

**1. pay 14% minus LIBOR receive the 8% coupon**

-(14% - LIBOR) + 8%

LIBOR - 14% + 8%

LIBOR - 6%

**2. enter a swap to pay LIBOR and receive 7%**

-LIBOR + 7%

**3. Combine the CFs of 1. and 2.**

LIBOR - 6% - LIBOR +7%

1% => you can fully hedge the position and earn a 1% “arbitrage” rate profit on 30m each year

@sfad- If you had issued a floater, you’d have done what you mentioned (receive LIBOR, pay fixed)… Inverse floater looked at differently is like receiving LIBOR.