Swaptions baby!

He asks the treasurer if Yorktown’s stock price may be adversely affected by rising interest rates given the high level of floating rate debt within its capital structure. Frank, however, believes that interest rates will not rise.

Which interest rate hedge instrument is most suitable for Yorktown given Frank’s assessment of Yorktown’s interest rate exposure and his view on interest rates: A. Payer Swaption B. Receiver Swaption C. Plain Vanilla Swap ** i see where I messed up here**. Logic: He is paying variable rates and will want to hedge exposure if rates increase. payer swaption will allow you to pay a fixed rate vs a receiver swaption where you receive a fix rate. therefore, if rates go out (eventhough he says they won’t) i will want to buy a payer swaption to pay a fix-rate lower than current rates.

What is the answer?

Frank believes the interest rate will not rise, does that mean he believes the will fall? If that is the case, i’d go for B, since he would exercise his swaption when rates fall and make a gain. If rates are going to stay stable, i’d go for C, since there is no reason for a swaption to become “in the money”, hence why would you pay a a swaption premium to enter the contract in the first place?