A Company Has a Firm Commitment to Roll Over a Variable

Multiple Choice

A company has a firm commitment to roll over a variable rate loan every 90 days. It hedges its interest rate risk by selling 90-day Treasury bills at a fixed price, for delivery in 90 days. The hedge is determined to be effective. Which statement is true?

A) If the Treasury bill rate increases, the company gains on the hedge.
B) If the variable rate on the loan increases, the company gains on its firm commitment to roll over the term loan.
C) Changes in the value of the short position in Treasury bills accumulate in other comprehensive income until interest expense is recognized on the loan.
D) If the Treasury bill rate declines, interest expense on the term loan after it is rolled over will be lower than if no hedging had occurred.