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Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?

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Final answer:

A company may engage in an interest rate swap contract to manage risks associated with fluctuating interest rates, similar to how firms hedge against currency risk.

Step-by-step explanation:

A company might decide to become involved in an interest rate swap contract to receive fixed interest payments and pay variable as a way to manage their interest rate exposure and potential risks associated with interest rate fluctuations. If a company has liabilities that are at a fixed interest rate, it may benefit from the swap when the variable rates are low. Conversely, if they have assets that are yielding a fixed return, engaging in a swap could protect them against a rise in interest rates, which would make their fixed return less attractive compared to the prevailing market rates.

Interest rate swaps are used as a hedging strategy, similar to how companies might hedge against currency risk. For example, a U.S. firm exporting to France and receiving payments in euros might enter into a hedging contract to protect against exchange rate fluctuations and ensure a certain exchange rate one year from now. Though there is a cost associated with hedging, it provides protection against adverse movements, much like the interest rate swap protects against adverse interest rate changes.

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