D&R A3 3 - 3 Today is June 1. Sustainable Corporation has an obligation of $25 million coming due on August 1. The company is planning to borrow this amount on August 1 to fulfill its obligation, and plans to pay back the loan on December 1. The company’s borrowing rate is LIBOR + 125 basis points. The company’s bank presents it with the following LIBOR term structure: # days LIBOR 30 0.90% 60 1.00% 90 1.05% 120 1.10% 150 1.15% 180 1.18% 210 1.20% 240 1.21% For the calculation of interest, the bank assumes 30 days in a month, and 360 days in a year. July 1 is the end of the company’s third quarter of operations, and the company must estimate the fair value of all its contracts, including derivatives, for its quarterly financial statements. LIBOR term structure on July 1: # days LIBOR 30 0.90% + 0.50% 60 1.00% + 0.50% 90 1.05% + 0.50% 120 1.10% + 0.55% 150 1.15% + 0.55% 180 1.18% + 0.55% 210 1.20% + 0.60% 240 1.21% + 0.60% What is the value of this FRA?
D&R A3
3 - 3
Today is June 1. Sustainable Corporation has an obligation of $25 million coming due on August 1.
The company is planning to borrow this amount on August 1 to fulfill its obligation, and plans to pay back the loan on December 1.
The company’s borrowing rate is LIBOR + 125 basis points.
The company’s bank presents it with the following LIBOR term structure:
|
# days |
LIBOR |
|
30 |
0.90% |
|
60 |
1.00% |
|
90 |
1.05% |
|
120 |
1.10% |
|
150 |
1.15% |
|
180 |
1.18% |
|
210 |
1.20% |
|
240 |
1.21% |
For the calculation of interest, the bank assumes 30 days in a month, and 360 days in a year.
July 1 is the end of the company’s third quarter of operations, and the company must estimate the fair value of all its contracts, including derivatives, for its quarterly financial statements.
LIBOR term structure on July 1:
|
# days |
LIBOR |
|
30 |
0.90% + 0.50% |
|
60 |
1.00% + 0.50% |
|
90 |
1.05% + 0.50% |
|
120 |
1.10% + 0.55% |
|
150 |
1.15% + 0.55% |
|
180 |
1.18% + 0.55% |
|
210 |
1.20% + 0.60% |
|
240 |
1.21% + 0.60% |
What is the value of this FRA?
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