# Treasurer’s Break-even Forward Rate of Interest Assignment Help With Solution

## Treasurer’s Break-even Forward Rate of Interest Assignment Help

1.The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73% and has lent funds for 6 months at 7.87%. The total amount is USD38 million. To cover his exposure created by the mismatch of maturities, the dealer needs to borrow another USD38 million for months, in 3 months’ time, and hedge the position now with an FRA. The market has the following quotes from three dealers:

 BANK A 3×6 6.92-83 BANK B 3×6 6.87-78 BANK C 3×6 6.89-80

a. What is (are) the exposure(s) of this treasurer? Represent the result on cash flow diagrams.

b. Calculate this treasurer’s break-even forward rate of interest, assuming no other costs.

c. What is the best FRA rate offered to this treasurer?

d. Calculate the settlement amount that would be received (paid) by the treasurer if, on the settlement date, the LIBOR fixing was 6.09%.

2.Globalcorp makes a sale of goods to a foreign firm and will receive FC 380,000 three months later. Globalcorp has incurred costs in dollars and wishes to make definite the amount of dollars it will receive in three months. It plans to approach a foreign bank to borrow an amount of local currency such that the principal plus interest will equal the amount Globalcorp expects to receive. The interest rate it must pay on its loan is 28%. With the borrowed funds, Globalcorp purchases dollars at the current spot rate that are invested in the United States at an interest rate of 8%. When Globalcorp receives the FC 380,000 at the end of three months, it uses the funds to liquidate the loan at the foreign bank. The effective tax rate in both countries is 40%.

a) What is the net amount that Globalcorp will receive if the current spot rate is FC 1.90 to the dollar?

b) How much less is this than the amount Globalcorp would have received if the remittance had been made immediately instead of three months later?

c) At what forward rate of exchange would the amount received by Globalcorp have been the same as that it would have obtained using the capital markets? Would Globalcorp have sold the FC forward short or long to hedge its position?

d) If a speculator took the opposite position from Globalcorp in the forward market for FC, would the speculator sell long or short? If the speculator received a risk premium for holding this position, would this place the current forward rate in FC above or below the expected future spot rate in FC per dollar?

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3.Transcorp has made a purchase of goods from a foreign firm that will require the payment of FC 380,000 six months later. Transcorp wishes to make definite the amount of dollars it will need to pay the FC 380,000 on the due date. The foreign firm is domiciled in a country whose currency has been rising in relation to the dollar in recent years. The tax rate in both countries is 40%. Transcorp plans to borrow an amount in dollars from a U.S. bank to immediately exchange into FCs to buy securities in the foreign country, which, with interest, will equal FC 380,000 six months later. The interest rate that will be paid in the United States is 12%; the interest rate that will be earned on the foreign securities is 8%. When at the end of six months Transcorp is required to make the payment in FC, it will use the funds from the maturing foreign securities in FC to meet its obligation in FC. At the same time it will pay off the loan plus interest in the United States in dollars.

a) What is the net amount that Transcorp pays to meet the obligation of FC 380,000 in six months if the current spot rate is FC 2.00 to the dollar?

b) How much more is this than the amount Transcorp would have paid if payment had been made immediately instead of six months later?

c) At what forward rate of exchange would the amount paid by Transcorp have been the same as that it would have paid using the capital markets? Would Transcorp have taken the long position in the forward FC or have sold the FC forward short to hedge its position?

d) If a speculator took the opposite position from Transcorp in the forward market for FCs, would the speculator be long or short? If the speculator received a risk premium for holding this position, would this place the current forward rate in FC above or below the expected future spot rate in FC per dollar?

4.(a) The following options are quoted at the market:

 Option Expiration Strike Price Premium Call 1 Month Rs.48.5/\$ Rs.0.30 Put 1Month Rs.48.5/\$ Rs.0.05

A trader is looking at the above options and planning to adopt long strip or long strap strategy to make profit from the rupee-dollar exchange rate volatility.

You are required to:

I. Show the pay off profile and indicate break even points for strip and strap strategies in a price range of Rs 47- Rs 50 for a dollar.
II. Comment on the desirability of the above two option strategies.

(b)Consider a call option on a stock with the following parameters

Stock price: Rs210
Strike Price: Rs 220
Time to expiration: 167 days
Risk free interest rate: 10 %
Variance of annual stock returns: 20%
Compute price of the call option.

5.From the undermentioned facts determine the cost of equity shares of company X

(i)Current market price of a share \$150.00
(ii)Cost of flotation per share on new shares \$3.00
(iii)Dividend paid on the outstanding shares over the past six years.

 YEAR DIVIDEND PER SHARE 1 10.50 2 11.02 3 11.58 4 12.16 5 12.76 6 13.40

(iv)Assume a fixed didvidend pay out ratio.
(v)Expected dividend on the new shares at the end of the current year is \$14.10 per share.

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