In if to make use of common derivative

In all three of our companies we find that the most
popular way they plan to offset the Interest Rate Risk exposure if to make use
of common derivative instruments or to use the approach of interest rate swap.
As we have not seen any usage of any specialized derivative we would like to
also recommend that in addition to their existing strategies to manage Interest
Rate Risk exposure, Interest Rate Collar (derivative instrument) can also be
looked into.

An interest rate collar is actually an investment
strategy that uses derivatives to hedge an investor’s exposure to interest rate
fluctuations. An Interest Rate Collar sets a maximum (which is termed as cap)
and minimum (which is termed as floor) boundary on a given floating rate (such
as LIBOR or Prime). If the floating rate rises above the maximum or cap level,
the company is credited for the difference. If the floating rate falls below
the minimum or floor level, the company is debited for the difference. Lastly
one of the alternate alternative methods for companies to mitigate their
exposure is to issue bonds to raise capital. This is something AAPL in November
20171. The
company issued $7 billion of debt in latest fund raising for $300 billion
shareholder program. AAPL had repeatedly borrowed in the corporate bond market
to reward its shareholders, rather than repatriate some of the $252.3 billion
in cash. Proceeds of the deal will be used for catchall ‘general corporate
purposes’ which includes share buybacks and dividend payments.

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We now
explore the bond landscape and outlook for near future, 2018. Figure 5.11 shows the trends in Government
bonds, corporate bonds and Treasury bills. We see that the long term treasure
yield curve is flattening, signaling a) weaker economy or b) Fed raising rates
too quickly. Mostly the outlook looks neutral for 2018. As we know Fed has
already planned for three more quarter-point increases in 2018. This may hurt
traditional bond prices, however investments with floating coupon rates may
benefit from future Fed rate hikes. High-grade investment-grade corporate
bonds, may remain a fair alternative to equities, which are very expensive now.
Bond market is expecting fewer rate hikes, on the view that economy is growing
too slowly and inflation is so low. Figure
5.12 shows the typical impacts on increase in Fed rates. We can see that
Fed funds rate and one-year Treasury rate track each other very closely,
however the interest rate on a 10-year Treasury bond does not. So it is safe to
conclude that the projected increase in fed funds rate for 2018 will successfully
raise short-term interest rates but have a limited impact on long-term interest
rates.

1
Apple issues
$7 billion of debt www.marketwatch.com/story/apple-is-tapping-the-corporate-bond-market-with-a-deal-that-could-raise-7-billion-2017-11-06