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(Solved) Torrens University Australia FINA2005 Derivatives and Risk Management Module 4 homework questions 1. Suppose you are long a 180-day LIBOR-based FRA


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Torrens University Australia
FINA2005 Derivatives and Risk Management
Module 4 homework questions
1. Suppose you are long a 180-day LIBOR-based FRA (receive floating) with
notional amount of $50,000,000. At expiration, LIBOR is 3 percent and the
strike rate (the agreed-upon rate) is 4 percent. Assuming a 360-day year,
what is the dollar profit or loss on this FRA? How would your answer change if
you were short (receive fixed)?
2. Suppose you are long a 90-day LIBOR-based FRA (receive floating) with
notional amount of $50,000,000. At expiration, LIBOR is 3 percent and the
strike rate (the agreed-upon rate) is 4 percent. Assuming a 360-day year,
what is the dollar profit or loss on this FRA? How would your answer change if
you were short (receive fixed)? Is your answer to this question twice the
amount of the previous question? Why or why not?
3. The following term structure of LIBOR is given.
Term Rat
e
6.00
%
6.20
%
6.30
%
6.35
% 90
days
180
days
270
days
360
days
a. Find the rate on a new 9 × 12 FRA. b. Consider an FRA that was established previously at a rate of 5.2 percent
with a notional amount of $30 million. The FRA expires in 90 days, and the
underlying is 180-day LIBOR. Find the value of the FRA from the perspective
of the party paying fixed and receiving floating as of the point in time at
which this term structure applies.
4. You are the treasurer of a firm that will need to borrow $20 million at
LIBOR plus 1.5 points in 30 days. The loan will have a maturity of 180 days,
at which time all the interest and principal will be repaid. The interest will be
determined by LIBOR on the day the loan is taken out. To hedge the
uncertainty of this future rate, you purchase a call on LIBOR with a strike of 9
percent for a premium of $25,000. Determine the amount you will pay back
and the annualized cost of borrowing for LIBORs of 7 percent and 11 percent.
Assume the payoff is based on 180 days and a 360-day year. The current
LIBOR is 9 percent.
1 2 5. A large, multinational bank has committed to lend a firm $35 million in 45
days at LIBOR plus 200 bps. The loan will have a maturity of 90 days, at
which time the principal and all interest will be repaid. The bank is concerned
about falling interest rates and decides to buy a put on LIBOR with a strike of
9 percent and a premium of $40,000. Determine the annualized loan rate for
LIBORs of 7 percent and 11 percent. Assume the payoff is based on 90 days
and a 360-day year. The current LIBOR is 9 percent. 3

 


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