A company is due to receive €2,500,000 two-months from today and wishes to save the funds for three months. Money market interest rate spreads for short-term euro transactions are presented in the table below. Money Market Euro Interest Rate Spreads (%) 1 month 2 months 3 months 4 months 5 months 6 months 0.20 - 0.25 0.28– 0.33 0.35 – 0.40 0.45 – 0.56 0.60 – 0.67 0.75 – 0.83 Assume that the company wishes to undertake a money market hedge to fix the future deposit rate. Explain the character of the company’s interest rate risk exposure and calculate the annualised forward interest rate that it can achieve using the current interest rates. Base calculations on months rather than days
A company is due to receive €2,500,000 two-months from today and wishes to save the funds for three months. Money market interest rate spreads for short-term euro transactions are presented in the table below. Money Market Euro Interest Rate Spreads (%) 1 month 2 months 3 months 4 months 5 months 6 months 0.20 - 0.25 0.28– 0.33 0.35 – 0.40 0.45 – 0.56 0.60 – 0.67 0.75 – 0.83 Assume that the company wishes to undertake a money market hedge to fix the future deposit rate. Explain the character of the company’s interest rate risk exposure and calculate the annualised forward interest rate that it can achieve using the current interest rates. Base calculations on months rather than days
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A company is due to receive €2,500,000 two-months from today and wishes to save the funds for three months.
|
Money Market Euro Interest Rate Spreads (%) |
|||||
|
1 month |
2 months |
3 months |
4 months |
5 months |
6 months |
|
0.20 - 0.25 |
0.28– 0.33 |
0.35 – 0.40 |
0.45 – 0.56 |
0.60 – 0.67 |
0.75 – 0.83 |
- Assume that the company wishes to undertake a money market hedge to fix the future deposit rate. Explain the character of the company’s interest rate risk exposure and calculate the annualised forward interest rate that it can achieve using the current interest rates. Base calculations on months rather than days.
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