Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Question
Chapter 26, Problem 9PS
a.
Summary Introduction
To discuss: Whether the swap shows profit or loss to the bank.
b.
Summary Introduction
To discuss: The amount charge by the bank to terminate the company A.
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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…
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of
$25,950,000, with the promise to buy them back at a price of $26,000,000.
a. Calculate the yield on the repo if it has a 5-day maturity.
b. Calculate the yield on the repo if it has a 15-day maturity.
(For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your percentage answers to 5
decimal places. (e.g., 32.16161))
Yield on the repo
a.
%
b.
Yield on the repo
Suppose a bank enters a repurchase agreement in which it agrees to buy Treasury securities from a correspondent bank at a price of
$31,950,000, with the promise to buy them back at a price of $32,000,000.
a. Calculate the yield on the repo if it has a 5-day maturity.
b. Calculate the yield on the repo if it has a 15-day maturity.
(For all requirements, use 360 days in a year. Do not round intermediate calculations. Round your percentage answers to 5
decimal places. (e.g., 32.16161))
a.
b.
X Answer is complete but not entirely correct.
Yield on the repo
Yield on the repo
1.02857 %
0.34286 %
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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