You have been appointed as an intern for PWC for two years, a company with diversified, international interests. The department wishes to borrow £10 million for a period of three years. As PWC’s credit rating is good and current market data suggests that the department could borrow at a fixed rate of interest at 8 per cent per annum or at a floating rate of LIBOR + 0.2 per cent per annum. However you believe that interest rates are likely to fall over the next three years, and favour borrowing at a floating rate.

Having being in the post for twelve months, you have a keen interest in using financial derivatives (such as futures and options) to both manage risk and generate revenue. However the board members have expressed concern that your activities may be involving the company in unnecessary risk.

1. Briefly describe and discuss different types of interest rate risk.
2. Briefly explain the meaning and use of financial derivatives, in general terms, and the advantages and disadvantages of such derivative for PWC
3. List the characteristics and benefits of interest rate swaps compared with other forms of interest-rate- risk management, such as forward rate agreements and interest rate futures.