Question

1. You owe interest payments based on LIBOR. Which one of these investments would work best to reduce your exposure to interest rates?
   1. Interest rate swap, take the fixed leg
   2. Interest rate swap, take the variable leg
   3. Long currency put
   4. Long currency call

Answer 1

Given that we owe interest payments based on LIBOR. So, the interest rates are of floating rate payments. So, to reduce the exposure to these floating rate payments,we need to choose interest rate swap and take the fixed leg. Interest rate is an agreement between two parties to exchange one stream of payments to other. So, by making use of this agreement we can reduce our exposure to our floating rate based interest payments.

So, we need to select interest rate swap, take the fixed leg.