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Company Treasurer Askabak expects to receive a cash inflow of $ 15,000,000 within 90 days. The Treasurer expects short-term interest rates to fall over the next 90 days. To hedge against this risk, the Treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. FRA is quoted at 5 percent. At the end of the term, LIBOR is 4.5 percent. Assume the notional principal for the contract is $ 15,000,000. 1.Calculate the profit or loss for company A as a result of joining the FRA. 2. Using appropriate terminology, define the FRA type used here. 3. Indicate whether the treasurer should enter a long or short position to hedge the interest rate risk.

Company Treasurer Askabak expects to receive a cash inflow of $ 15,000,000 within 90 days. The Treasurer expects short-term interest rates to fall over the next 90 days. To hedge against this risk, the Treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. FRA is quoted at 5 percent. At the end of the term, LIBOR is 4.5 percent. Assume the notional principal for the contract is $ 15,000,000. 1.Calculate the profit or loss for company A as a result of joining the FRA. 2. Using appropriate terminology, define the FRA type used here. 3. Indicate whether the treasurer should enter a long or short position to hedge the interest rate risk.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Company Treasurer Askabak expects to receive a cash inflow of $ 15,000,000 within 90 days. The Treasurer expects short-term interest rates to fall over the next 90 days. To hedge against this risk, the Treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. FRA is quoted at 5 percent. At the end of the term, LIBOR is 4.5 percent. Assume the notional principal for the contract is $ 15,000,000.

1.Calculate the profit or loss for company A as a result of joining the FRA.

2. Using appropriate terminology, define the FRA type used here.

3. Indicate whether the treasurer should enter a long or short position to hedge the interest rate risk.

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