If company A is concerned interest rates will rise causing their floating-rate debt costs to increase, they would be most likely to do a swap to: a. Pay fixed-rate and receive-floating rate. b. Pay floating-rate and receive-fixed rate. c. Swaps are not used for this purpose. d. It would depend on whether the swap is in, at or out of the money
Answer is A The simple way to remember this is ask yourself what do they want to pay? In this case they want to pay fixed as they are afraid the floating rate will rise, so look for the swap where they pay fixed. A more detailed way is the following: current situation: - floating so if they enter a pay fixed receive floating the equation becomes: - fixed + floating - floating = fixed => eliminating floating rate and risk of costs of floating debt rising. Hope that helps