Evaluate ABC Corporation's Interest Rate Swap Strategy

ABC Corporation, a U.S.-based multinational firm, has recently issued a long-term fixed-rate debt at a rate of 5.5% to finance its expansion in Europe. Meanwhile, its European subsidiary has a variable-rate loan tied to the Euribor rate of 3-months. Given market expectations that interest rates in Europe may rise, ABC Corporation is concerned about the potential increase in interest expenses for its subsidiary.

To manage this risk, ABC Corporation is considering entering into an interest rate swap where it receives a variable rate and pays a fixed rate. The fixed rate for the swap is 5.25%, while the initial variable rate is approximately 3.0%. As part of your analysis, evaluate the swap strategy ABC Corporation is pursuing, including the benefits and risks associated with this approach. Discuss how this swap aligns with the corporation’s overall financial strategy and the potential impact on its cash flows.