Question

(a) Explain why would a company engage in an interest rate swap over other means of managing risk?

(b) The AT Corporation is holding a large number of XXY Bank shares in an investment portfolio and wishes to protect the value of the investment. The XXY Bank shares currently trade at $22.00. The AT Corporation buys a put option with an exercise price of $20.00 per share and a premium of $0.85 per share. By entering this option strategy, explain whether the AT Corporation will exercise the option if the spot price is above or below the exercise price. [You are required to clearly define a put option, spot price, exercise price, and premium - in order to explain your final answer].