A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Which one of following statements is correct? Group of answer choices If the settlement rate is 4.8% three months from today, then the buyer pays the seller. To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA. Without the FRA, the bank will lose if the market interest rate drops at the end of three months. If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84 To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.

A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Which one of following statements is correct? Group of answer choices If the settlement rate is 4.8% three months from today, then the buyer pays the seller. To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA. Without the FRA, the bank will lose if the market interest rate drops at the end of three months. If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84 To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 37QA

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A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Assume 360 days a year, which one of the following statements is incorrect? Group of answer choices To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead. If the settlement rate is 4.8% three months from today, then the buyer pays the seller. If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84 To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA. Without the FRA, the bank will lose if the market interest rate…
(FRA)A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 6.711%. There are actually 92 days in the three-month FRA period. If the settlement rate is 4.331% three months from today, then the FRA is worth $____________ (Keep two decimal places.) the answer is 12,031.28 please provide steps
(FRA)A bank is considering using a "three against six" $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three- month Eurodollar deposit. The agreement rate with the buyer is 4.682%. There are actually 92 days in the three-month FRA period. If the settlement rate is 6.518% three months from today, then the FRA is worth $ (Keep two decimal places.)
(FRA)A bank is considering using a "three against six" $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 5.025%. There are actually 92 days in the three-month FRA period. If the settlement rate is 4.375% three months from today, then the FRA is worth $__________________ (Assume 360 days a year and keep two decimal places.)
Royal Bank charges administration fees of 2.9% of the loan amount per annum. Target Corporation has negotiated an interest rate of 10.5% per annum on a long-term loan the company wants to take from the bank. The compensating balance (b) is 4%, and there is 11% reserve requirement (RR). What is the contractually promised rate of return to the bank from the loan? (Instructions: Please round your answer to 4 decimal places and do not show it in percent. If the answer is 2.5678%, enter 0.0257)
Assume the time from acceptance to maturity on a $2,280,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine the amount the exporter will receive if he holds the B/A until maturity and also the amount the exporter will receive if he discounts the B/A with the importer’s bank.
Required: Assume the time from acceptance to maturity on a $2,280,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine the amount the exporter will receive if he holds the B/A until maturity and also the amount the exporter will receive if he discounts the B/A with the importer’s bank. Note: Do not round intermediate calculations.
Suppose that a bank does the following: a. Sets a loan rate on a prospective loan with BR = 4.23% and ϕ = 3.16%. b. Charges a 0.33 percent loan origination fee to the borrower. c. Imposes a 9 percent compensating balance requirement to be held as noninterest-bearing demand deposits. d. Holds reserve requirements of 8 percent imposed by the Federal Reserve on the bank’s demand deposits. Calculate the bank’s ROA on this loan.
You open a 90-days Eurodollar time deposit three months from now. You enter into a 3x6 forward rate agreement (FRA). The amount you will deposit is $13,884,503. The six-month Libor rate is 3 The three-month Libor rate is 1 What is your forward rate?
The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Required: Compute for the effective interest rate assuming: a. Loan is not discounted. Loan is without compensating balance. b. Loan is discounted. Loan is without compensating balance. c. Loan is not discounted. Loan is with compensating balance. d. Loan is discounted. Loan is with compensating balance. e. Which of the loan arrangements above is most beneficial to the firm? Justify.
A bank agrees to buy three-month forward €500,000 at $1.14/€ from its client and simultaneously sells three-month €500,000 at $1.16/€ to offset the position. Three months later the Euro appreciates to $1.15/€ and the client declares bankruptcy. The following is true, except A At the end of three months, the bank will incur a loss of $5,000 compared to the expected gain. B At the end of the three month, the bank will incur a gain of $5,000 compared to the expected gain. C The current transaction requires the bank In three months to purchase €500,000 in exchange for $570,000. D The current transaction requires the bank In three months to sell €500,000 in exchange for $580,000.
On December 31, 2021, London Bank granted a P5,000,000 loan to a borrower with 10% stated rate payable annually and maturing in 5 years. The loan was discounted at the market interest rate of 12%. Unfortunately, the financial condition of the borrower worsened because of lower revenue. On December 31, 2023, the bank determined that the borrower would pay back only P3,000,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid on the P5,000,000 loan. The present value of 1 at 12% is .57 for five periods and .71 for three periods. The present value of an ordinary annuity of 1 at 12% is 3.60 for five periods and 2.40 for three periods. What is the impairment loss to be recognized on December 31, 2023? a. 2,000,000 O b. 1,442,960 O c. 1,922,960 O d. 1,670,000