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Consider a finance company with the following type of business. The firm provides small corporations with short-term loans (under 6 months maturity). These loans are made at LIBOR plus 3 percent. The firm raises money primarily by selling 30 year fixed-rate bonds.

(a) When interest rates increase, what happens to the cash flows of the firm?

(b) What type of swap position would hedge the firm from interest rate risk?

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