Which statement about fixed-rate leases, floating-rate leases, and risk-management tools is true?

Which statement about fixed-rate leases, floating-rate leases, and risk-management tools is true?

• A. Floating-rate leases adjust with an index; fixed-rate leases lock payments; risk-management tools are unnecessary.
• B. There is no difference between fixed-rate and floating-rate leases.
• C. Fixed-rate leases lock payments; floating-rate leases adjust with an index; risk-management includes rate collars, caps, floors, and hedging.
• D. Fixed-rate leases adjust with an index; floating-rate leases lock payments.

Answer: (C)

Fixed-rate leases provide payment stability by locking the rent for the term, while floating-rate leases have payments that move with an index, so they can go up or down as rates change. Because floating-rate leases expose parties to interest-rate risk, risk-management tools are used to control that exposure. Rate collars set a upper and lower bound on the rate, caps place a maximum, floors place a minimum, and hedging (such as interest-rate swaps) offset adverse movements. This combination—fixed payments in fixed-rate leases, index-based adjustments in floating-rate leases, and the use of collars, caps, floors, and hedging for risk control—matches the statement described. The other options misstate how these leases work or claim risk management isn’t needed.

Fixed-rate leases provide payment stability by locking the rent for the term, while floating-rate leases have payments that move with an index, so they can go up or down as rates change. Because floating-rate leases expose parties to interest-rate risk, risk-management tools are used to control that exposure. Rate collars set a upper and lower bound on the rate, caps place a maximum, floors place a minimum, and hedging (such as interest-rate swaps) offset adverse movements. This combination—fixed payments in fixed-rate leases, index-based adjustments in floating-rate leases, and the use of collars, caps, floors, and hedging for risk control—matches the statement described. The other options misstate how these leases work or claim risk management isn’t needed.