It is now the 31^st January. The Treasurer of Sigma Company is reviewing cash forecast and funding requirements and has identified the need for the following transactions:

Transaction 1:

Sigma Company will have a surplus of 1 million from the 1^st of May for 3 months, which will need to be deposited to earn additional interest. The Treasurer has seen inverted interest rate yield curves in the financial press, so is considering using a 3v6 FRA quoted at 5% - 5.6% to hedge the interest rate risk exposure. He is also considering the use of interest rate options as an alternative strategy.

Transaction 2:

Sigma Company also needs to borrow 20 million longer term debt to finance expansion. The Treasurer would prefer to borrow at a floating rate but does not feel that the company can obtain competitive rates. He is thus considering the possibility of borrowing fixed and entering into a swap agreement. Sigma Companys advisors have identified Omega Company as a possible counter party. Details of the current borrowing rates that each company can achieve are as follows:

Company	Best Fixed Rate	Best Variable Rate
Sigma Company	7%	LIBOR + 3%
Omega Company	6%	LIBOR + 1%

(a) Which of the following statements concerning the swap is / are true?

(i) Omega Company has been offered lower interest rates due to having a better credit rating

(ii) Under the swap loan principal amounts are exchanged

(iii) If Omega Company defaults on the loan it has taken out, then Sigma would be liable under the swap.

Select one:

a. (i), (ii) and (iii)

b. (i) and (ii) only

c. (i) and (iii) only

d. (i) only