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Suppose European Satellite Corporation (ESC) could get its bond issued only with a fixed rate of 8.2%. However, ESC estimates that its business tends to
Suppose European Satellite Corporation (ESC) could get its bond issued only with a fixed rate of 8.2%. However, ESC estimates that its business tends to be correlated positively with interest rates. In other words, when interest rates rise, the business does well, and vice versa. Therefore, it would like to pay a floating rate on its bonds instead. Which of the following derivatives transactions would help ESC achieve its goal? O Currency swap O Interest rate swap O Structured note O Inverse floater There are several different types of derivative securities, including forwards, futures, swaps, inverse floaters, and structured notes. These securities may be used to manage the risks of business organizations or to speculate on certain market events. Consider the descriptions or characteristics in the following table and indicate the type of derivative to which each corresponds: Description or Characteristic Type of Derivative This type of debt security has a coupon that decreases when interest rates increase, and vice versa. The most common form of this type of derivative involves counterparty A making a fixed-rate interest payment to counterparty B while receiving a floating-rate interest payment from the counterparty, and vice versa. This type of security is backed or collateralized by another debt security and may take the form of a zero coupon security or may receive periodic interest payments This type of derivative security is intended to eliminate exchange rate risk and Interest rate swap involves counterparties that exchange the principal and interest payments of Currency swap the loan in one currency for the equal discounted value of a counterparty's loan Inverse floater in another currency Sarah is an investor interested in purchasing securities. The securities' cash flows are derived from the interest payments made on collateralized loans. Which derivative should she choose? O Currency swap O Interest rate future
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