c) It is January now. Manager wants to refinance his assets in March and is concerned rates may rise. He wants to borrow $100m for 3 months starting March. The March expiry Eurodollar Futures Quote is 95. (i.e., 5% annual). Manager is fine with paying 5% interest on the borrowing. Compute the net cost to the manager is the Eurodollar settles at 90 in March.
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- You enter in a long position in a 6x12 FRA at a LIBOR rate of 3.00% and a nominal value of $10M. (a) When does this FRA expire in months? (b) Suppose, at maturity, the 6-month LIBOR rate is 3.5%. What is your payoff on that FRA? Note you should calculate this value at the maturity of the FRA, which is month 6.Suppose we wish to borrow $10 million for 91 days beginning next June, and that the quoted Eurodollar futures price is 93.23. What 3-month LIBOR rate is implied by this price? How much will be needed to repay the loan? Show work and discuss result.Scenario is that you are suppose to borrow an amount of $9,000,000 for 91 days at LIBOR beginning next September. In this case, we might want to hedge against a potential (Increase or Decrease) in interest rates between now and September by taking necessary position in Euro dollars. Substantiate your answer with what position needs to be taken with explanations?
- The market’s 1 year interest rate is 6% while the 2-year interest rate is 7%. b) If a company needs to borrow $10m in 1 year for 1 years’ time, what interest will be agreed in a FRA?Suppose the September Eurodollar futures contract has a price of 96.4. You plan to borrow $50m for 3 months in September at LIBOR, and you intend to use the Eurodollar contract to hedge your borrowing rate. a. What rate can you secure? b. Will you be long or short the Eurodollar contract? c. How many contracts will you enter into? d. Assuming the true 3-month LIBOR is 1% in September, what is the settlement in dollars at expiration of the futures contract? (For purposes of this question, ignore daily marking-to-market on the futures contract.)Use the following spot rates to answer the following questions. Maturity Spot rate (%) 1 year 4.93% 2-years 4.47% 3-years 4.12% 5-years 3.84% 10-years 3.68% Assume that Citibank is offering to sell a one-year Treasury bill next year with a rate of 5% (i.e., you can enter into a contract today to lock in a 5% return on a one-year security purchased/sold next year). Based on the above spot rates, does the Citibank offer generate any arbitrage opportunities? If so, compute the total $ profits that can be generated from this opportunity, specifying the steps you would take. Assume you will borrow/invest $1,000. O Yes: profit of $5.55/ $1000 borrowed. O No: $0 O No: Loss of $5.55/ $1000 borrowed.based on Citibank's offered rate. O Yes: $55.55/$1000 borrowed.
- Suppose that the current price of oil is $ 90 per bbl. Suppose it costs $ 0.5 per bbl per month to store oil (payable monthly in advance). Suppose also that the term structure is flat with a continuously compounded rate of interest of 3 % for all maturities. Calculate the forward price of oil for delivery in 3 months.A lender will be having £10 million to lend from December to March next year. Right now, the December Eurodollar futures contract has price 94. If the lender uses 10 December Eurodollar futures to hedge his future lending, does he long or short futures? If the 3-month LIBOR in December turns out to be 1.2% (3-month effective), how much money does the lender get in March from his hedged lending of £10 million?The 1-year spot rate is 8%p.a. effective. The term structure of 1-year effective forwardratesisasfollows: attimet=1therateis7%,attimet=2therate is 6%, at time t = 3 the rate is 5%. (a) Determine the term structure of spot rates. (b) A fixed income security pays £10 annual coupons and it is redeemed after 4 years for £100. Compute its price at time t = 0.
- A 180-day $500,000 banker's acceptance (BA) is currently trading at a discount of 3.75%. You purchase the BA today and sell it 90 days later when the three-month yield is 4.10%. What is your rate of return? Use 360-day to annualize. The following is true, except A The price of the BA today is $490,625 B The price of the BA 90 days from today is $494,875 C Your rate of return is -3.46% D Your rate of return is 3.46%4Your company needs to borrow $5 million in three months’ time for a period of 6 months (180 days). You are concerned that the changes in interest rates will be unfavorable. You approach an FRA dealer, who provides the following forward quotations: 3Mv9M(19): 9.75–8.55 3Mv6M(19): 9.65–8.45 Required: a) What will be the agreed rate if you enter an FRA agreement with this dealer? Explain your answer. b) Assuming the reference rate on the settlement date is 10 per cent, which party to the FRA is required to make a payment and why? c) Calculate the compensation amount on the settlement date. Show all calculations. d) List and briefly explain two advantages and two disadvantages of FRAs.
