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Hi,
I am wondering if you could explain why the solution has opted for the company to swap future for floating when in the question it states that future interest rates are uncertain to due to parliamentary elections.
To me this indicates that it is beneficial for the AA rated company to borrow floating and swap for fixed thus mitigating its exposure to any adverse movements as a result of the upcoming elections.
Does it have something to do with the comparative advantage?
Whether is is advantageous for them to borrow fixed or floating depends on whether their income will be affected by the results of the elections. It does not depend on their credit rating.
However, in this question, since you weren’t told how they wanted to borrow, it is purely a question of deciding which way round would be advantageous in terms of reducing the effective interest (whether it be fixed of floating). This obviously does depend on the respective credit ratings.
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