Equity Asset Valuation WoChrysler LLC, owned by Fiat Group, 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 94.73. In three months time Libor settles at 6.09% in the spot rate. What is the dollar amount Chrysler will pay (or receive) to settle this transaction three months from now? (Recall, the notional amount for this type of contract is $1,000,000.)

Equity Asset Valuation WoChrysler LLC, owned by Fiat Group, 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 94.73. In three months time Libor settles at 6.09% in the spot rate. What is the dollar amount Chrysler will pay (or receive) to settle this transaction three months from now? (Recall, the notional amount for this type of contract is $1,000,000.)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 37QA

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Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option. The put option has an exercise rate of 2.15% and a maturity of three months. The underlying forward rate is based on the LIBOR, which has a current term structure of # days LIBOR 90 2% 270 2.3% The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium. c. Hindsight being 20-20, should Tango have purchased the put option?
Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option. The put option has an exercise rate of 2.15% and a maturity of three months. The underlying forward rate is based on the LIBOR, which has a current term structure of # days LIBOR 90 2% 270 2.3% The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium. b. Suppose that in three months’ time, the six-month LIBOR turns out to be 2%. What is the annualized rate of return on Tango’s position with the put option?
Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option. The put option has an exercise rate of 2.15% and a maturity of three months. The underlying forward rate is based on the LIBOR, which has a current term structure of # days LIBOR 90 2% 270 2.3% The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium. d. Tango could also have used a forward rate agreement (FRA) to hedge its future lending rate. What are the similarities and differences between interest rate option and FRA?
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