The Treasury Department of Daniel's Manufacturing asked you to analyze a potential hedging strategy for $13 billion of term loan debt liability on its balance sheet. The term loans pay interest monthly based on SOFR plus 2.75%. The term loan matures in 3 years. The three-year swap rate is 4%. A three-year cap on SOFR (monthly caplets) at a 4.5% strike rate, can be bought or sold for 75 bps times the Notional hedged. A three-year floor on SOFR (monthly floorlets) at a 3.5% strike rate, can also be bought or sold for 75bps times the Notional hedged. Describe and discuss how you would implement the following possible hedges of the floating rate interest exposure on the term loans.

Calculate the net interest cost for the following months (including the hedge) for each of the three alternatives in question 3. (assume an Actual / 360-day count for all items). Assume average SOFR for each month set at the following rates:

Calculate in excel

a) March 4.25%

b) April 5.00%

C) May 3.25%