For the next three questions: Consider the following three different debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. Strategy # 1: Borrow $1,000,000 for three years a fixed rate of interest of 7%. Strategy # 2: Borrow $1,000,000 for three years at a floating rate of LIBOR +2%, to be reset annually. The current LIBOR rate is 3.50% Strategy # 3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. Choosing strategy #2 will A) guarantee the lowest average annual rate over the next three years. B) eliminate credit risk but retain repricing risk. C) maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks. D) preclude the possibility of sharing in lower interest rates over the three-year period. Which strategy (strategies) will eliminate credit risk? A) Strategy #1 B) Strategy #2 C) Strategy #3 D) Strategy #1 and #2 If your firm feels very confident that interest rates would fall or, at worst, remain at current levels and are very confident about the firm's credit rating for the next 10 years, which strategy would you likely choose? (Assume your firm is borrowing money.) A) Strategy #3 B) Strategy # 2 C) Strategy #1 D) Strategy # 1, #2, or #3, you are indifferent among the choices. An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an: A) forward rate agreement. B) interest rate future. C) interest rate swap. D) none of the above You buy (long) an interest rate futures contact. If interest rate goes up, the value of your long position A) increases B) decreases. The treasury function of most non-financial firms, the team typically responsible for transaction exposure management, is NOT usually considered a profit center. A) True B) False Hedging transaction exposure with option contracts allows the firm to benefit if exchange rates are favorable but protects the firm if exchange rates turn unfavorable. A) True B) False