Explain the gamble P&G took on its 1993 dollar-denominated interest rate swap

What will be an ideal response?

P&G's interest rate swap can be divided into a plain vanilla swap and "the gamble." In the gamble, P&G sold BT the equivalent of a call option, which earned P&G an annual premium of 75 basis points (later changed to 88 basis points) on the $200 million notional principal, in return for P&G agreeing to pay BT a fixed, semi-annual interest. The fixed rate depended on the difference between the yield of a five-year U.S. Treasury Note and the price of a 30-year U.S. Treasury Bond on 4 May 1994 (i.e., six months after the deal was signed). Therefore, P&G paid nothing to BT for the first half-year, but thereafter, its fixed interest payments would be paid half-yearly for the remaining 4.5 years of the contract in nine semi-annual payment periods. Clearly, P&G was betting that interest rates would fall, but instead they rose.