Interest Rate Swap Strategy for Aswan Corp

Very Hard Derivative Strategies Swap Strategies

Aswan Corp has a significant exposure to floating interest rates because of its existing corporate loan portfolio. In an effort to hedge this exposure, Aswan Corp decides to enter into an interest rate swap agreement. According to the terms of the swap, Aswan will pay a fixed interest rate of 4% while receiving a floating interest rate tied to the 6-month LIBOR rate.

In the context of interest rate swaps, which of the following best describes the potential risks and benefits associated with this strategy for Aswan Corp?

Aswan Corp is entirely eliminating its interest rate risk, thereby ensuring a predictable cash flow over the life of the swap.

Aswan Corp will benefit from a decrease in interest rates, as it will continue to receive floating payments while paying a fixed rate, but it may face losses if rates rise significantly.

This swap allows Aswan Corp to speculate on interest rate movements, potentially leading to unlimited losses if interest rates rise sharply.

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