Mini Case: 23 - 10 4. Swaps involve the exchange of cash payment obligations on debt between two parties, usually because each party prefers the terms of the other's debt contract. Swaps can reduce each firm's financial risk. For example, currency exchange rate risk can be eliminated if a U.S. firm with a pound-denominated debt could swap their debt with a British firm that has an equivalent dollar-denominated debt. h. Describe how commodity futures markets can be used to reduce input price risk. Answer: Essentially, the purchase of a commodity futures contract will allow a firm to make a future purchase of the input material at today's price, even if the market price on the good has risen substantially in the interim. i. It is January and Tennessee Sunshine is considering issuing $5 million in bonds in June to raise capital for an expansion. Currently, TS can issue 20-year bonds at 7 percent, but interest rates are on the rise and Stooksbury is concerned that long-term interest rates might rise by as much as 1 percent before June. You
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.