In mid-July, JK Ltd (a US firm) holds a pay-fixed, receive-floating 6×9 FRA contract which was entered into 6 months ago (i.e. in mid-January). The FRA rate is 0.70% per annum and the notional amount is $20,000,000. The 6×9 FRA reaches expiration now (in mid-July), and the following LIBOR rates are observed from the market: Maturity 30-day LIBOR Interest rate (p.a.) 0.5% 90-day LIBOR 1.1% 180-day LIBOR 1.2% 270-day LIBOR 1.3% Note: The FRA contracts follow the standard US FRA settlement terms and adopt the Actual/360 day count convention. All interest rates are measured with a compounding frequency reflecting the length of the period they apply to. Required: (a) Based on the information above, explain whether JK Ltd makes a gain or loss by showing the settlement amount for JK Ltd to settle the 6×9 FRA at expiration. Report your answer in 2 decimal places (dps). (b) Suppose that JK Ltd plans to take a 20-million 90-day floating-rate loan in mid-October from a local bank. The firm wants to hedge the interest rate risk involved in the floating- rate loan by entering into another FRA contract in mid-July. Based on the LIBOR rate information in mid-July, explain what type of FRA contracts it should use. Hint: You need to specify what the values of M and N are for such a MXN FRA contract, and whether the firm should buy (long) or sell (short) such a contract. (c) What should be the FRA rate of the contract specified in part (b). Report your answer in percentage (%) with 4 dps i.e. xx.xxxx%.
In mid-July, JK Ltd (a US firm) holds a pay-fixed, receive-floating 6×9 FRA contract which was entered into 6 months ago (i.e. in mid-January). The FRA rate is 0.70% per annum and the notional amount is $20,000,000. The 6×9 FRA reaches expiration now (in mid-July), and the following LIBOR rates are observed from the market: Maturity 30-day LIBOR Interest rate (p.a.) 0.5% 90-day LIBOR 1.1% 180-day LIBOR 1.2% 270-day LIBOR 1.3% Note: The FRA contracts follow the standard US FRA settlement terms and adopt the Actual/360 day count convention. All interest rates are measured with a compounding frequency reflecting the length of the period they apply to. Required: (a) Based on the information above, explain whether JK Ltd makes a gain or loss by showing the settlement amount for JK Ltd to settle the 6×9 FRA at expiration. Report your answer in 2 decimal places (dps). (b) Suppose that JK Ltd plans to take a 20-million 90-day floating-rate loan in mid-October from a local bank. The firm wants to hedge the interest rate risk involved in the floating- rate loan by entering into another FRA contract in mid-July. Based on the LIBOR rate information in mid-July, explain what type of FRA contracts it should use. Hint: You need to specify what the values of M and N are for such a MXN FRA contract, and whether the firm should buy (long) or sell (short) such a contract. (c) What should be the FRA rate of the contract specified in part (b). Report your answer in percentage (%) with 4 dps i.e. xx.xxxx%.
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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Transcribed Image Text:In mid-July, JK Ltd (a US firm) holds a pay-fixed, receive-floating 6×9 FRA contract which
was entered into 6 months ago (i.e. in mid-January). The FRA rate is 0.70% per annum and the
notional amount is $20,000,000.
The 6×9 FRA reaches expiration now (in mid-July), and the following LIBOR rates are
observed from the market:
Maturity
30-day LIBOR
Interest rate (p.a.)
0.5%
90-day LIBOR
1.1%
180-day LIBOR
1.2%
270-day LIBOR
1.3%
Note: The FRA contracts follow the standard US FRA settlement terms and adopt the
Actual/360 day count convention. All interest rates are measured with a compounding
frequency reflecting the length of the period they apply to.
Required:
(a) Based on the information above, explain whether JK Ltd makes a gain or loss by showing
the settlement amount for JK Ltd to settle the 6×9 FRA at expiration. Report your answer
in 2 decimal places (dps).
(b) Suppose that JK Ltd plans to take a 20-million 90-day floating-rate loan in mid-October
from a local bank. The firm wants to hedge the interest rate risk involved in the floating-
rate loan by entering into another FRA contract in mid-July. Based on the LIBOR rate
information in mid-July, explain what type of FRA contracts it should use.
Hint: You need to specify what the values of M and N are for such a MXN FRA contract,
and whether the firm should buy (long) or sell (short) such a contract.
(c) What should be the FRA rate of the contract specified in part (b). Report your answer in
percentage (%) with 4 dps i.e. xx.xxxx%.
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