Yankee Company Ltd is a US. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of is product in Europe. The company expects Euro interest rates lo rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on is Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the settlement date rises to 3.8% Required: a) Calculate the amount that Yankee Co needs to pay lo settle the FRA on the settlement date b) Yankee Co management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Euro 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co prefers to pay a Bred rate of 3 25%. It enters into a swap agreement with a counter-party to lock in the fixed rate for a year. If the one-year Euribor reference rat
Yankee Company Ltd is a US. based company that has plans to borrow EUR 10 million to fund increased working capital to boost sales of is product in Europe. The company expects Euro interest rates lo rise so it enters into a 3X9 Forward Rate Agreement (FRA) to lock in the interest rate it will pay on is Euro borrowing. The current borrowing rate on the contract date is 3.5%. The borrowing rate on the settlement date rises to 3.8%
Required:
a) Calculate the amount that Yankee Co needs to pay lo settle the FRA on the settlement date
b) Yankee Co management subsequently decides to extend its Euro borrowings for a year as its increased working capital in Europe has increased sales and profits. Yankee's main bank which funds its European operations offers it a one-year loan of Euro 10 million at a floating rate of interest of one-year Euro Interbank Offered Rate (Euribor) plus 3.5%. Yankee Co prefers to pay a Bred rate of 3 25%. It enters into a swap agreement with a counter-party to lock in the fixed rate for a year. If the one-year Euribor reference rate is 0.05% at the end of the year, which party will settle the difference and what will the settlement amount be?
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