Câu 37: CFA Level 3

Milson Investment Advisors (MIA) specializes in managing fixed income portfolios for institutional clients. Many of MIA's clients are able to take on substantial portfolio risk and therefore the firm's funds invest in all credit qualities and in international markets. Among its investments, MIA currently holds positions in the debt of Worth inc., Enertech Company, and SBK Company. Worth Inc. is a heavy equipment manufacturer in Germany. The company finances a significant amount of its fixed assets using bonds. Worth's current debt outstanding is in the form of non-callable bonds issued two years ago at a coupon rate of 7.2% and a maturity of 15 years. Worth expects German interest rates to decline by as much as 200 basis points (bps) over the next year and would like to take advantage of the decline. The company has decided to enter into a 2-year interest rate swap with semiannual payments, a swap rate of 5.8%, and a floating rate based on 6-month EURIBOR. The duration of the fixed side of the swap is1.2. Analysts at MIA have made the following comments regarding Worth's swap plan:"¢ "The duration of the swap from the perspective of Worth is 0.95.""¢ "By entering into the swap, the duration of Worth's long-term liabilities will become smaller, causing the value of the firm's equity to become more sensitive to changes in interest rates."Enertech Company is a U.S.-based provider of electricity and natural gas. The company uses a large proportion of floating rate notes to finance its operations. The current interest rate on Enertech's floating rate notes, based on 6-month LIBOR plus 150bp, is 5.5%. To hedge its interest rate risk, Enertech has decided to enter into a long interest rate collar. The cap and the floor of the collar have maturities of two years, with settlement dates (in arrears) every six months. The strike rate for the cap is 5.5% and for the floor is 4.5%, based on 6-month LIBOR, which is forecast to be 5.2%, 6.1%, 4.1%, and 3.8%, in 6,12, 18, and 24 months, respectively. Each settlement period consists of 180 days. Analysts at MIA are interested in assessing the attributes of the collar. SBK Company builds oil tankers and other large ships in Norway. The firm has several long-term bond issues outstanding with fixed interest rates ranging from5.0% to 7.5% and maturities ranging from 5 to 12 years. Several years ago, SBK took the pay floating side of a semi-annual settlement swap with a rate of 6.0%, a floating rate based on LIBOR, and a tenor of eight years. The firm now believes interest rates may increase in 6 months, but is not 100% confident in this assumption. To hedge the risk of an interest rate increase, given its interest rate uncertainty, the firm has sold a payer interest rate swaption with a maturity of 6 months, an underlying swap rate of 6.0%, and a floating rate based on LIBOR. MIA is considering investing in the debt of Rio Corp, a Brazilian energy company. The investment would be in Rio's floating rate notes, currently paying a coupon of 8.0%. MIA's economists are forecasting an interest rate decline in Brazil over the short term. Which of the following statements correctly assesses SBK's swaption strategy to mitigate the risk of an interest rate increase? If interest rates increase:

1. A. the strategy will increase the market risk of SBK's debt.
2. B. the strategy will increase the cash flow risk of SBK's debt. — đáp án hiện tại
3. C. the strategy will effectively hedge the interest rate increase.