grocery store

• operates on thin profit margins; but has large floating rate debt
• wants to be protected from adverse effects of rate fluctuations
• swap: store purchases 'interest rate cap' with tenor of 3 years and a strike rate of 8%
• analysis: benefits from rate declines but protected at 8% on high end.
• cost: fee or premium paid to purchase the cap

• lease payments are fixed rate assets generating 9.7% but has floating rate debt at libor
• the firm does not have access to fixed rate debt or a public rating public or private placement
• problem: floating debt exposes firm to rates high enough to absorb all of its earnings
• the firm is placed in a speculative position with respect to interest rates and wishes to hedge this risk
• solution: 3-year interest rate swap: 7.2% fixed for floating libor: +1.5% margin
• result: company assured 9.7%-7.2%-1.5% = 1.0% margin in hedged position

• gco can get 3-year floating debt but wishes to convert to fixed to safeguard its margin
• but: gco also wants some benefit from falling floating rates
• solution: participating swap
• the participating swap rate (psr) is set at 7.8%
• if libor gt psr: gco pays psr
• if libor lt psr: gco pays a blended rate
• the blended rate is computed by setting a contractual fraction of the np at the psr and the remainder at the libor
• this way gco gets some benefit from lower rates but is protected from higher rates

• mf needs interest rate protection but does not need a full hedge
• if interest rates rise a little, competitors will not raise prices: need protection
• if interest rates rise a lot, competitors will raise prices: no protection needed
• solution: mf purchases an 'interest rate corridor' (irc) with a tenor of 3 years, a cap of 9.5%, coupon of 8%, and spread of 1.5%
• if libor lt 9.5%, mf pays 8%
• if libor gt 9.5%, mf pays libor - 1.5%

• fc carries large portfolio with floating returns
• the assets are supported mostly by fixed rate private placement
• problem: balance sheet mismatch under fluctuating interest rates and loss in profits if interest rates drop
• solution: fc purchases 'interest rate floor' (irf) with strike rate of 6% and tenor of 2 years
• a fee of 58 bps is paid to ba, in return ba guarantees a floor of 6%
• if libor lt 6% ba makes cash payment to offset the loss

• hc needs 18 months to construct new property
• a 'take out' fixed rate financing is priced at 10-year treasury notes (tnotes) + a spread
• problem: hc is exposed to tnote movements during the construction period
• solution: 'treasury lock' swap witha tenor=18 months
• the lock provides hc with rate certainty during the construction period
• at end of the tenor, the lock is cash settled (i.e. if rates rise during the construction period ba will make offsetting cash payment to hc; if rates fall hc will make offset pmt to ba

• dipm wants 5-year private placement priced at 5-year t-note
• but financing is not available until 6-months from today
• dipm wants to benefit if t5 rates drop during these 6 months
• the private placement 6 months from now is not guaranteed
• problem: dipm is exposed to higher t5 rates; and does not have alternatives if the placement does not occur
• solution: a 'treasury cap' swap
• treasury cap protects dipm against t5 movement above the strike level
• also allows dipm to take advantage of lower rates
• dipm pays a premium
• the treasury cap is settled at the end of the 6-month period (i.e. if t5 is higher, ba makes an offsetting cash pmt to dipm; if lower, dipm benefits)

• variable diesel fuel cost is major input for tc but transport pricing is fixed
• tc wants to reduce uncertainty in fuel costs
• problem: diesel fuel prices are volatile
• solution: commodity swap for a tenor of 1 year to synthetically convert its floating diesel prices to a fixed price that matches transport pricing
• the swap is structured to meet tc's annual budgeting cycle