Chapter 11, Problem 37QA

A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss.  The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%.  There are actually 92 days in the three-month FRA period. Assume 360 days a year, which one of the following statements is incorrect?     Group of answer choices To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.   If the settlement rate is 4.8% three months from today, then the buyer pays the seller.     If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84     To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.     Without the FRA, the bank will lose if the market interest rate…

Brexylite plc is due to pay €1,750,000 to its European suppliers in 3 months’ time. The financial manager has decided to hedge the currency risk of this account payable. The following information has been provided by the company’s bank: Spot rate (£ per €): 1·1410 ± 0·0022 3 months forward rate (£ per €): 1·1574 ± 0·0041 6 months forward rate (£ per €) 1.1582 ± 0.0032 Calculate the expected (£) Stirling payment if the 3 months forward market is used

Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $0.15 to $0.12 in 10 days. The following interbank lending and borrowing rates exist: Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million pesos in the interbank market, depending on which currency it wants to borrow. Assume 360 days in year for your calculations. Do not round intermediate calculations. Round your answers to the nearest dollar. How could Blue Demon Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy. Blue Demon Bank can capitalize on its expectations by borrowing (DOLLARS OR PESOS) , converting it to (DOLLARS OR PESOS), lending the (DOLLARS OR PESOS), and repaying to (DOLLARS OR PESOS) loan. The expected profit is $ BLANK? Assume all the preceding information with this exception: Blue Demon Bank expects the peso to appreciate from its present…