XYZ company invests in a ten (10) year maturity, fixed-rate loan that pays eight percent (8%) per annum every 3 months. To finance the investment, it has borrowed in the short-term money market at 3-month LIBOR +1% and must re-borrow in the money market every three months for ten (10) years.

Answer ALL of the following parts to this question:

1. Describe what type(s) of financial risk XYZ faces with this funding strategy.
2. If the 3-month LIBOR interest rate increases, will XYZ gain or lose on it investment strategy? Explain your answer.
3. Assume XYZ enters into an interest rate swap with its bank in which it promises to pay five percent (5%) per annum and receive 3-month LIBOR. Calculate the hedged net profit on the investment and explain whether the interest rate risk has been removed?