Question

A corporate treasurer wishes to hedge against an increase in future borrowing costs due to a possible rise in short-term interest rates. She proposes to hedge against this risk by entering into a long 3 × 12 FRA. The current term structure for LIBOR is as follows: Term (Days) Interest Rate (%) 30 5.1 90 5.25 180 5.7 360 5.95 Calculate the rate the treasurer would receive on a 3 × 12 FRA.Suppose the treasurer went long this FRA. Now, 45 days later, interest rates have risen and the LIBOR term structure is as follows: Term (Days) Interest Rate (%) 45 5.15 315 6.15 Calculate the market value of this FRA based on a notional principal of $10,000,000.At expiration, the 180-day Libor is 6.25 percent. Calculate the payoff on the FRA. Does the treasurer receive a payment or make a payment to the dealer?

          A corporate treasurer wishes to hedge against an increase in future borrowing costs due to a possible rise in short-term interest rates. She proposes to hedge against this risk by entering into a long 3 × 12 FRA. The current term structure for LIBOR is as follows:    Term (Days)                  Interest Rate (%)           30                                        5.1           90                                      5.25         180                                        5.7         360                                      5.95 Calculate the rate the treasurer would receive on a 3 × 12 FRA.Suppose the treasurer went long this FRA. Now, 45 days later, interest rates have risen and the LIBOR term structure is as follows:    Term (Days)        Interest Rate (%)            45                            5.15           315                           6.15 Calculate the market value of this FRA based on a notional principal of $10,000,000.At expiration, the 180-day Libor is 6.25 percent. Calculate the payoff on the FRA. Does the treasurer receive a payment or make a payment to the dealer?

Added by Rodney E.

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