a) Three months from today you plan to borrow $1.8 Billion for 6 months at LIBOR
ID: 2795165 • Letter: A
Question
a) Three months from today you plan to borrow $1.8 Billion for 6 months at LIBOR. You hedge 65% of your interest rate risk with a euro dollar futures contract priced at 99.2. If settled in arrears, what is your payment if the 6-month LIBOR is .28% in two months?
b) Six months from today you plan to borrow $433 million for 6 months at LIBOR. You hedge 100% of your interest rate risk with a euro dollar futures contract priced at 99.4. If settled in arrears, what is your payment if the 6-month LIBOR is 2.5625% in six months?
Explanation / Answer
a) 3 months from now amount of borrowings 1.8 billion term of borowings 6 months hedge 65% of interest future contarct price= 99.2 LIBOR rate = 0.28% INTEREST RATE FFOR 6 MONTHS WITH 0.28% LIBOR 25200 NON HEDGE INTEREST AMOUNT 8820 FUTURE CONTRACT PRICE 99.2 TOTAL ARREARS 8919.2 b) 6 months from now amount of borrowings 433 million term of borowings 6 months hedge 100% of interest future contarct price= 99.4 LIBOR rate = 2.5625%
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