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Chelsea Finance Company receives floating inflow payments from its provision of floating-rate loans. Its outflow payments are fixed because of its recent issuance of long-term bonds.

a. Should Chelsea hedge or not hedge using swaps if rates were to decline in the future? Suppose that Chelsea does not want to hedge its interest rate risk, because it believes interest rates may increase.

b. What kind of a swap would you recommend in this scenario? (Hint: Think of an option embedded swap that may help)

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