Firstly, swaps are an effective way of transforming fixed credit cost obligations to floating form of interest obligations. Essentially, under this derivative two parties to a credit deal settle on exchanging their obligations of interest rates. Only the difference in the payments of interest is exchanged meaning no exchange of funds at the initial swapping stage. On the part of caps, firms engage in the buying and selling of interest rate floors, collars or caps. In the case of GM, it would probably sell caps. Reason for this is that GM would receive premium payment from writing the contract which would in turn reduce all borrowing costs linked to the sold cap. On the other hand swaptions include buying or selling of the option to swap interest rates based on certain terms. This kind of derivative provides swapping rights to the owner through which they pay the floating expense and not the received fixed expenses. In the case of sold swaps, they also involve premiums which in turn decrease the overall fixed interest expenses. There was also the option of Treasury-bond options which would provide the holders, GM, the right to purchase treasury notes on a particular maturity date based on a certain exercise plan. Maturity period for both of them is same but the striking prices are different. On recommendation it would be best that GM uses cap …show more content…
Particularly, there was only one specialised analyst in the field of interest rate risks. It was to some extent a one-man job because the recommendation awaited by the managers acted as advice on the way forward. Following the recommendation the treasury department through its various assistant treasurers engaged in the various tasks based on the different functions performed. It is important that GM continues to manage its exposure to interest rate. This is because economic trends change very rapidly leading to unexpected fluctuations of interest rates. Unexpected changes may cause very great changes in the business of GM. However, if management of such exposures is improper, the firm may suffer from high set interest rates due to incorrect reading and analysis of the economic markets. As a result GM will be incapacitated venture into new