On December 20, 2017, the third Wednesday of the month, Mr. Ricardo Ricotta, a partner in Careening
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Question:
Several investment banks, including Tutti Finanza S.p.A., have contacted Mr. Ricotta, suggesting hedging choices and expressing their willingness to quote prices on a variety of hedging products. Before discussing the specific quotations with them, he decides to ask his new assistant treasurer, Mr. Michele Manicotti, to do few calculations of his own based on market data. Mr. Manicotti graduated from the undergraduate program at NYU Stern with excellent grades in all the finance courses, including the difficult course, "Futures and Options." Mr. Manicotti decides to take a close look at the problem, where your inputs are required.
Mr. Manicotti obtains the following zero-coupon interest rates from the yield curve he has constructed based on LIBOR, Eurodollar futures and swap quotes from the Bloomberg terminal:
1 yr 1.0%
2 yr 1.5%
3 yr 2.0%
4 yr 2.5%
For purposes of the calculations, all interest rates can be assumed to annual rates with annual compounding. (In other words, you do not need to worry about day-count conventions.)
1. What are the current swap rates for 2 yr and 3 yr swaps?
2. If CCS swaps its existing 2 yr and 3 yr floating rate borrowing, what would its new fixed cost of debt be for each of these tenors? How should CCS executive the swap, i.e., what would they be paying and what would they be receiving to "lock in" the rate?
Related Book For
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
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