76. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .6

Question

76. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?

A. $50,000

B. $100,000

C. $118,000

D. $120,000

77. You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA? A. Net payment of $12,391.57 to you

B. Net payment of $12,500 to you

C. Net payment of $50,000 to you

D. Net payment of $48,309.18 to you

78. A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90.

A. The bank pays $3,0084.52 at the end of 3 months

B. The bank pays $3,0084.52 at the end of 6 months

C. The counterparty pays $3,0084.52 at the end of 3 months

D. The counterparty pays $3,0084.52 at the end of 6 months

Explanation / Answer

76. Current 3 month LIBOR is 5.5%, so that interest to be paid is 5.5%+0.65% = 6.15%. Thus interst for the first 3 months = 6.15%*4 million *1/4 (as it is quarterly) = $61,500

Now LIBOR changes to 5% and so the interest rate is 5.65%. So interst for next 3 months = 5.65%*4 million *1/4 = $56,500

Total interest paid over 6 month period = 61,500 + 56,500 = $118,000

Hence choice C is the correct answer.

77. A 3*6 FRA means the rate at which we can borrow after 3 months for (6-3) 3 months.

After 3 months you can borrow $10 million @3% as against @3.5% (which is the current rate)

Now after 6 months, your gain is 0,5%*10 million *1/4 = $12,500

Now this needs to be discounted back by 3 months at 3.5% i.e. PV of payoff = 12500 / (1+3.5%)^1/4 = $12,392.96

Hence Choice A is the correct Answer

78. Agreement rate is 5% but the settlement rate is 5.25%. So bank will receive as the rate after 3 months is 5.25% (as against the agreement rate os 5%)

So Interest gain over next 3 months = 0.25%*5 million *90/365 = $3,082.19

So this must be discounted by 3 months to calculate the PV of the gain. i.e. 3125 / 1.0525^(90/365)= $3,085.28

So Couterparty pays $3,0043.52 at the end of 3 months

Choice D is the correct answer.

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