In its 1993 and 1994 interest rate swaps, was P&G speculating or hedging? Explain
What will be an ideal response?
It appears as though P&G was speculating in an attempt to lower borrowing costs. P&G had no way of knowing at the time the contract was signed what it would eventually pay.
In its 1993 deal, P&G doubled the notional principal of its replacement swap, reinforcing the belief that this deal was largely a speculative bet on the directional movement of the U.S. yield curve. P&G's 1994 German mark-denominated deal also appears to be speculative. If at any time during the year the swap rate were to cross the wedding-band boundaries, P&G's spread would have equaled ten times the difference between the
four-year German mark swap rate on 16 January 1995 and 4.50%. This leverage factor
of 10 greatly increased P&G's risks.
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a. True b. False Indicate whether the statement is true or false