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The Corporate Treasurer of LetsDoIt Ltd, a company based in Mexico plans to borrow MXN 500 million pesos in 3 months’ time for a period of 3 months at the base rate plus 50 basis points. A lot of speculation is going on regarding a potential change in the government and interest rates have since been quite volatile.
The Corporate Treasurer had recently attended a professional workshop on interest rate risk management where he had learnt about interest rate collars and interest rate guarantees, among others. He has been requested by the Board of Directors to make a presentation on the two financial instruments. Elaborate on the main points that are expected to be included in the presentation.
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- The Bank of England’s Monetary Policy Committee raised interest rates to 3.5 per cent on December 15, 2022 while governor Bailey declaring that “inflation has reached its peak”. What was the immediate impact of this action on financial markets? You have been given £10 million on December 16 to build an optimal portfolio in current market conditions. What would you be investing on, how much on each financial instrument and why? Explain your strategy in detail. Direct and indirect investment are all allowed. No cryptocurrency.Microsoft corporation wants to reduce its interest rate exposure and will need to borrow $1,000,000 in six months' time for a 6-month period. The interest rate at which it can borrow today is 6-month LIBOR plus 0.5 percent. Let us further assume that the 6-month LIBOR currently is at 0.89465%, but the company’s treasurer thinks it might rise as high as 1.30% over the forthcoming months.The treasurer choses to buy a 6x12 FRA in order to cover the period of 6 months starting 6 months from now. He receives a quote of 0.95450% from his bank and buys the FRA for 1,000,000 $ on April 8th.Characteristics of the FRA known on trade date:Trade date 08/04/2019Spot date (t+2) 12/04/2019Fixing date 10/10/2019Settlement date 12/10/2019Maturity date 12/04/2020 Contract period: 182 daysFRA rate 0.95450% On the fixing date (October 10th, 2019), the 6-month LIBOR fixes at 1.26222, which is the settlement rate applicable for the company's FRA. a) Calculate and interpret the interest differential, did the…ABC Corporation wishes to raise money by selling a 90-day promissory note in the short-term money markets. The note promises to pay the holder $17,000,000 at maturity. If yields on similar risk notes are currently 2.8% p.a., how much money will ABC Corporation receive for the note? If the purchaser of the note holds it until maturity, what is the total amount of interest they will earn? For the purchaser in 2), what will be the return on investment (ignoring taxes)? Need help answering all these please!
- A Treasurer buys a 6-month CD issued by a top-class bank with a tenor of 180 days at a yield of 16%. The face value at issue is GH¢10m. In 90-days time the buyer sells the CD when the 3-month secondary market for CDs issued in the names of top-class banks is 40/14.50. The buyer has held the CD for 90days, but now wants his cash back. What is the return on the investment for the Treasurer? Prepare a Cash forecast for the below information The sales and purchases for Ahemba Ltd are as follows: Month April May June Credit Sales $160,000 $140,000 $192,000 Credit Purchase $ 68,000 $64,000 $80,000 The company will pay wages of $8,000, $7,000 and $8,400 in April, May and June respectively. Interest payments are 3,000 per month during the period. The company will purchase equipment costing $50,000 and $4,000 in June. Ahemba Ltd estimates that 10% of its sales will be collected in the…Honesty Company is exploring to issue a financial instrument next year. They are researching for a reasonable interest rate to offer. The financial instrument is expected to cover for 180 days. Government Treasury Bills are being offered with the following rates: 30 day – 1.5%; 60 day – 2%; 90 day – 2%; 180 day – 2.50%; and 360 day – 3%. Inflation was reported at 1.2%. Honesty must be able to safeguard at least 3% of the risk for this issuance.What is the appropriate interest rate (round off your answer to two decimal places)?A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months’ time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield. Using the following data, show how 90-day bank-accepted bills futures contracts can be used to hedge the interest rate risk to which the business is exposed. Show the calculation and timing of all transactions and cash flows (ignore transaction costs and marginrequirements). Today’s data: current commercial paper yields 6.00 per cent perannum 90-day bank-accepted bills futures contract 93.75. Data in threemonths: commercial paper yields 7.00 per cent perannum 90-day bank-accepted bills futures contract93.25.
- Suppose you are working as a treasurer in Citibank and your bank has taken a PKR250 million loan. The interest on the loan is KIBOR+50bp paid semiannually. The duration of the loan is four years. As you will have to pay interest, you are worried that in the future interest rates are likely to increase and you want to hedge this position by entering into a Swap contract. You ask Bank Al-Habib whether they would be willing to enter into a swap agreement and they send you these semi-annual swap rates: Period Bank Pays Bank Receives 2 years 3.34 3.37 3 years 4.01 4.04 4 years 4.47 4.50 5 years 4.79 4.82 6 years 5.02 5.05 Consider the following questions: What is the company’s cost of funds?A friend of yours tells you that in Japan a specific Japanese treasury note matures for $1000 in two years can be bought or sold for $925. What is the annualized risk-free rate in this example? ) You happen to notice the same security can be purchased or sold domestically for $945, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct?ABC Corporation wishes to raise money by selling a 90-day promissory note in the short-term money markets. The note promises to pay the holder $17,000,000 at maturity. If yields on similar risk notes are currently 2.8% p.a., how much money will ABC Corporation receive for the note?
- A company is due to receive €2,500,000 two-months from today and wishes to save the funds for three months. Money market interest rate spreads for short-term euro transactions are presented in the table below. Money Market Euro Interest Rate Spreads (%) 1 month 2 months 3 months 4 months 5 months 6 months 0.20 - 0.25 0.28– 0.33 0.35 – 0.40 0.45 – 0.56 0.60 – 0.67 0.75 – 0.83 A bank is willing to offer the company a forward rate agreement (FRA), incorporating a forward rate fixed at the level calculated in part a). When the money is received, the €LIBOR rate is 0.35%. Calculate and explain the terms on which the FRA is settled.Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?In a daily meeting, the Chief Financial Officer (CFO) gave Ari the followingtable of market ratesSpot exchange rate Yen 106/$U.S. dollar interest rate per annum 10% Japanese Yen interest rate per annum 6% and told Ari that the company’s financial analyst expected the Japanese Yento depreciateagainst the U.S. dollarby 3.46%in 90 days.Assume there are 360 days in a year, and all interest rates are simple interest rates.If the financial analyst’s prediction about the US dollar and Japanese Yen turned out to be true: b.1) What would the spot exchange rate (Yen/$) be in 90 days? b.2) Would Ari make a profit by borrowing 1 million US dollar and investing in the money markets? If yes, how much profit would Ari realize in 90 days?If no, explain why.