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Question: Federal Expresss cash flows from operations are highly correlated with the economy.When business is booming and corporate profits are high, firms dramatically increase their use of Federal Express.

(A) If Federal Express wanted to reduce the volatility of their operating cash flows, recommend a derivative transaction into which they could enter. You can describe a specific security or just the general nature of how the derivative should be structured.

(B) Federal Express currently has the following outstanding debt: 200 million in principal of fixed-rate debt as well as 200 million in principal of floating-rate debt. Both issues are ten-year bonds currently priced at par. They pay semi-annual coupons. Thus Federal Express has 400 million in total debt in their capital structure. The CEO of Federal Expresswould like to take advantage of the swap market to convert the firm's debt in to either all fixed or all floating. Which of the two types of debt do you recommend Federal Express to swap out and why?

(C) The current ten-year swap rate is 7.4%. Federal Expresss chief economist argues that the swap marketis inefficient as best estimates expect interest rates to stay at 6% for the next ten years. Do you agree? Explain completely.

(D) What effect, ifany would your swap recommendation have on Federal Expresss equity B? Explain completely.

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