8.5 Chrysler LLC. Chrysler LLC, the now privately held company sold off by Daiml

Question

8.5 Chrysler LLC. Chrysler LLC, the now privately held company sold off by DaimlerChrysler, must pay floating rate interest three months from now. It wants to lock in these interest payments by buying an interest rate futures contract. Interest rate futures for three months from now settled at 93.07, for a yield of 6.93% per annum a. If the floating interest rate three months from now is 6.00%, what did Chrysler gain or lose? b. If the floating interest rate three months from now is 8.00%, what did Chrysler gain or lose?

Explanation / Answer

As it must pay floating rate interest, there is a risk that it would have to pay higher interest rate if the rates increase three months from now. If it locks interest rates futures at 6.93%, it will benefit from low interest expenses if the rates after three months are above 6.93%.

a) As floating rate is 6%, Chrysler lose 6.93% - 6% = 0.93% as it pays more more interest charges.

b) As floating rate is 8%, Chrysler gain 8% - 6.93% = 1.07% as it pays less interest charges.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.