Project Ashcombe — Rate Hedging & Accelerated Buyback
A 1.5-hour Corporate Derivatives / Rate & Equity Derivatives case study with a complete model answer
The Situation
Ashcombe Chemical Corporation (NYSE: ASHC) makes specialty intermediates and coatings additives. Three segments: Coatings Additives, which is rheology modifiers, dispersants and defoamers; Performance Intermediates, which is custom-manufactured intermediates for crop protection and pharmaceutical customers; and Electronic Materials, which is photoresist ancillaries and high-purity solvents.
Ashcombe Chemical Corporation
- Sector
- Specialty chemicals — coatings additives, custom-manufactured performance intermediates for crop protection and pharmaceutical customers, and high-purity electronic materials
- Size
- Geography
- United States; headquartered in Wilmington, Delaware, with a US-listed equity and a US-dollar funding stack
- Ownership
- Situation
The Prompt
You are staffed on a Corporate Derivatives / Rate & Equity Derivatives engagement for Ashcombe Chemical Corporation. You have 90 minutes to work through the materials and produce an answer deck and an Excel model.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 90 minutes.
PART 1
Capital structure, the mix and leverage
PART 2
Sizing the swaps
PART 3
What the swap costs, and why an interior point
PART 4
Pre-issuance hedging of the September issue
PART 5
Selected publicly traded companies
PART 6
Intrinsic value and four uses of the same capital
PART 7
The repurchase ladder and the de-rating each rung can absorb
PART 8
Accelerated repurchase mechanics, the collar, and the earnings bridge
PART 9
The board pages
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Find the variable the two mandates share before you answer either
- 02
Price the exposure before you argue about the target
- 03
Prove the swap has no expected cost, then refuse to sell it as one
- 04
Ask whether before you ask how much
- 05
Build the constant-multiple ladder, then break it
- 06
Show the accretion row and then disown it
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Fixed/floating mix as an interior optimum
The share of debt bearing a fixed rate, and the recognition that neither corner is the safe answer. A fully floating book leaves earnings exposed to policy rates. A fully fixed book removes that exposure and also removes a natural hedge, because a cyclical industrial's earnings and the policy rate fall together, so floating-rate debt returns cash in exactly the year the earnings do not. The right answer is an interior point, and defending it means quantifying the offset the hedge gives up rather than asserting that less exposure is better. Where the comparable companies sit on the same measure is evidence about what the market is used to pricing, not a target.
Par interest rate swap, and why its expected cost is zero
A pay-fixed, receive-floating swap struck at the par swap rate. The fixed rate is set so that the present value of the fixed leg equals the present value of the floating leg priced off the forward curve, which means the swap cannot change the expected interest bill — it changes the distribution of it. Two consequences follow, and both are tested. The cumulative expected cost across the life of the swap is zero by construction rather than by coincidence, so a model that produces anything else has an arithmetic error. And when the curve is inverted at the front the swap receives in the early years and pays in the later ones: that is carry, not value, and presenting it as a saving is the single most common way this analysis goes wrong.
Pre-issuance hedging — treasury lock versus payer swaption
The two instruments that fix the benchmark component of a bond's coupon before it prices. A treasury lock costs no premium and obliges the company to settle at market whether or not the issue happens. A payer swaption costs a premium and buys the right to walk away. The choice turns entirely on whether the issuance is contingent. A bond refinancing a scheduled maturity is not contingent — a maturity does not negotiate — so the optionality is a right the issuer cannot use, and the correct way to see that is to annualize the premium over the annuity of the new bond so the two instruments are compared in the same unit. Neither instrument hedges the credit spread, and a page that does not say so has left the larger of the two exposures off the exhibit.
Accelerated share repurchase and VWAP settlement
A structure in which the company pays the dealer the full amount on day one, receives a fixed proportion of the shares immediately, and settles the remainder against the average daily volume-weighted average price over an averaging period, less a discount that pays for the dealer's borrow and hedge. Two properties matter. It retires stock quickly and without a visible open-market bid, which is what a board asking for speed and discretion is buying. And it fixes the dollars and not the price: an open-market program can be stopped when the stock reaches a level at which buying it no longer creates value, and this one cannot, because the money is spent on day one. That makes the size of the program the risk control rather than the price, and the honest way to show it is the average price at which the program stops adding to per-share value.
Collared ASR — no cash premium is not costless
A variant in which the settlement price is floored and capped, in exchange for a larger initial share delivery and no cash premium. It costs nothing in cash and it is not free: it is paid in shares forgone, and it is paid in exactly the state of the world the repurchase exists for. If the stock falls, the floor stops the company buying the cheap stock it set out to buy; if the stock rises, the cap hands back shares in a state where the company should be buying less. Pricing it means valuing the difference in shares retired at intrinsic value in both directions and setting the earlier delivery against it. A collar is a view that the stock is more likely to rise than to fall, while a repurchase is a view that the stock is worth more than it trades at, and holding both at once is incoherent.
Per-share intrinsic value versus earnings accretion
The two ways a repurchase is judged, and the reason they disagree. A repurchase creates value in exactly one way — it buys a claim on the company for less than the claim is worth, and the difference accrues to the holders who do not sell — which makes it a one-time transfer rather than a rate of return. Earnings accretion is a different thing entirely: any time the after-tax cost of the funding sits below the earnings yield of the stock being retired, a debt-funded repurchase is accretive, and the gap is usually wide enough that accretion is arithmetically certain at every size. So the accretion row rises monotonically, including at sizes that breach the company's own leverage policy, and a board shown only that row will execute the whole authorization and be right about the arithmetic it was shown. The exhibit that has to sit beside it is per-share intrinsic value with the de-rating priced.
Financial policy versus covenant
A board's leverage policy and a credit agreement's leverage covenant are different constraints with different consequences, and quoting one without the other misleads in both directions. The covenant is a legal test, usually on a trailing twelve-month basis, that triggers a default. The policy is a self-imposed band, usually set against a forward basis and calibrated to a target rating, that triggers a re-rating rather than a default. A well-designed policy binds well before the covenant does — that is the point of having one — and the interesting question in a capital-return case is what crossing the policy costs, not whether the covenant is safe. Answering that means finding evidence in the market rather than asserting a rule of thumb, and being explicit about how much a handful of observations can carry.
Fixed-charge coverage on a capital-intensive issuer
Interest coverage divides earnings by interest and ignores everything else the business must spend. On an issuer whose capital program does not flex with demand — a chemicals plant carries turnaround and compliance spending that cannot be deferred into a trough — a lender sizes on fixed-charge coverage instead: Adjusted EBITDA less capital expenditure less cash taxes, over net interest. When a case has a defining operating feature, no credit statistic that ignores that feature may stand alone. Quote both, say which one governs, and test both in the downside rather than only in the base case.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Fixed/floating mix optimization
- —Interest rate swap and swaption structuring
- —Accelerated share repurchase mechanics
- —Collared ASR and VWAP settlement
- —Pre-issuance hedging and treasury locks
- —Policy recommendation to the board
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Ashcombe — Rate Hedging & Accelerated Buyback
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a corporate derivatives case study in an investment banking interview?
It is a case where the client is an issuer rather than a buyer or a seller, and the decisions are treasury and capital-allocation decisions: how much of the interest expense to fix, how to hedge a financing that has not yet priced, and what to do with the next dollar of capital. There is no transaction, so none of the M&A apparatus applies — no premium, no purchase accounting, no synergies, no fairness opinion, no football field. It appears in capital markets, debt capital markets and corporate solutions groups, and it tests something the deal cases do not: whether you can price an instrument straight when the flattering way to present it is available and nobody on the page will contradict you.
How should you allocate 90 minutes across this case?
Across the whole workbook rather than a corner of it. A working budget that sums to 90: about 14 minutes reading the three documents and screening the raw extract, which is deciding which companies belong in the set before you type anything; about 58 minutes at the keyboard, split roughly 20 on the swap sizing and the hedging economics, 16 on the selected companies and the four uses of capital, 15 on the ladder and the repurchase structure, and the balance on the earnings bridge and the credit statistics; about 5 minutes of transcription off the extract; and about 12 minutes at the end for the three board pages. The template measures 317 cells to fill, which collapse to 116 distinct formulas once the fill-right and fill-down repetitions are counted properly — most of the workbook is one formula copied across four rungs, three price scenarios or five forward years. That arithmetic only works because two of the ten tabs are given in full and sixty driver rows arrive already linked; without those the exercise would not fit and the honest response would be to cut the scope rather than move the clock.
Why is a pay-fixed interest rate swap not a saving even when it receives in year one?
Because the fixed rate on a par swap is set so that the present value of the fixed leg equals the present value of the floating leg priced off the same forward curve the floating debt will actually pay. That is what 'par' means, and it makes the swap's expected cost exactly zero by construction. What the swap changes is the distribution of the interest bill, not its level. When the curve is inverted at the front, the near-dated forwards sit above the fixed rate and the swap receives in the early years — but the far-dated forwards sit below it and the swap pays those receipts back. Adding the years up gives zero, every time, and if your model does not, you have made an arithmetic error rather than found a trade. Selling the hedge on the first-year receipt is the classic mistake, and it is visible to anyone who asks what year four looks like.
Why is earnings accretion the wrong test for a share repurchase?
Because it is guaranteed. A debt-funded repurchase is accretive to earnings per share whenever the after-tax cost of the funding is below the earnings yield of the stock being retired, and on a company trading at a modest multiple that condition holds with hundreds of basis points to spare. So the accretion row rises monotonically with the size of the program — including at sizes that push leverage through the board's own policy band — and it would rise for a company buying stock at twice what it is worth. Accretion is arithmetic about the funding cost; value is a comparison between what you pay and what the claim is worth. The two point the same way while the multiple is held constant and opposite ways the moment leverage moves the multiple, which is the situation a large debt-funded buyback creates.
How do you decide how much of a repurchase authorization to execute?
By building the ladder and then breaking it. Take several sizes, apply deployable cash first because it is the cheapest funding available, fund the balance with debt, and compute pro forma leverage and per-share intrinsic value at a constant multiple for each. That exhibit will say bigger is better all the way to the top, and on its own it is the argument for executing everything. Then ask what happens if the multiple is not constant: compute how much de-rating each rung can absorb before its gain disappears, and compare that tolerance with what the market actually pays for companies either side of the leverage level you are crossing. The right size is the largest one whose gain is not smaller than the de-rating the evidence says the crossing costs — and an authorization is a ceiling rather than an instruction, so recommending less than the board asked for is a legitimate answer as long as you say what happens to the balance.
What does an accelerated share repurchase give up compared with buying in the open market?
Price discipline. The company pays the full amount on day one and receives most of the shares immediately, which is what buys the speed and the discretion. But the number of shares is not known until the averaging period ends, and the dealer retains the right to end that period early — which it will exercise when the position suits the dealer, not when the company would choose. An open-market program can be stopped the moment the stock reaches a level at which buying it no longer creates value; an accelerated one cannot, because the money is already spent. The way to show what that is worth is to compute the average price at which the program stops adding to per-share value and express it as a distance above today's price. That distance is the margin of safety, and because it cannot be managed once the trade is on, the size of the program becomes the risk control instead.
About This Corporate Derivatives / Rate & Equity Derivatives Case Study
Corporate Derivatives / Rate & Equity Derivatives case study for investment banking interviews. 90-minute format covering fixed/floating mix optimization, interest rate swap and swaption structuring, accelerated share repurchase mechanics. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Corporate Derivatives. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
90-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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