ABC Bank has committed to lend to a firm $30 million in 90 days. The loan...

 

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ABC Bank has committed to lend to a firm $30 million in 90 days. The loan will mature 60 days after its initiation. The bank is concerned about the volatile interest rates and decides to use an FRA to hedge its position. The term structure of LIBOR is as follows: Term (days) Rate (%) 30 2.4809 60 2.5606 90 2.6066 120 2.6711 150 2.6798 180 2.6848 270 2.7012 360 2.8836 1. Explain the risk(s) that the bank is exposed to. 2. Should the bank be the long or the short? Explain. 3. What is the underlying asset? 4. Price the FRA. ABC Bank has committed to lend to a firm $30 million in 90 days. The loan will mature 60 days after its initiation. The bank is concerned about the volatile interest rates and decides to use an FRA to hedge its position. The term structure of LIBOR is as follows: Term (days) Rate (%) 30 2.4809 60 2.5606 90 2.6066 120 2.6711 150 2.6798 180 2.6848 270 2.7012 360 2.8836 1. Explain the risk(s) that the bank is exposed to. 2. Should the bank be the long or the short? Explain. 3. What is the underlying asset? 4. Price the FRA.

Answer rating: 100% (QA)

1 The bank is exposed to interest rate risk Given that the loan will mature 60 days after initiation ... View the full answer