A corporate treasurer plans to hedge some borrowing costs over the next five years by using an interest rate swap. The treasurer currently pays LIBOR plus a 50 basis point spread on a revolving loan facility, where the size of the loan is $8,000,000. Questions are: Describe the cash flows that the corporate treasurer wants to pay and receive by using the swap
• What swap rate can the corporate treasurer lock in today? What will be the new cost of borrowing for the corporate treasurer?
• Will the corporate treasurer realize a profit or a loss if LIBOR increases by 10% next month and stays there for the next five years?