In its 1993 dollar-denominated interest rate swap, how much did P&G expect to gain? How much did it eventually lose? Is there any way to justify this tradeoff on financial grounds?
What will be an ideal response?
The goal of P&G's treasury in transacting the 1993 dollar-denominated swap was to reduce borrowing costs to 40 basis points below the commercial paper rate on an expiring interest rate swap, which had a $100 million notional principal. This translated into annual savings of just $400,000 for each of the last 4.5 years of the contract. P&G eventually declared
a $157 million loss. It is difficult to justify taking such extreme risks for such a small, targeted gain.
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