Today, Barclays made a 10,000,000 loan to Vandelay Industries, an import/export company founded and run by Art
Question:
Today, Barclays made a 10,000,000 loan to Vandelay Industries, an import/export company founded and run by Art Vandelay. The loan's maturity is 2 years, and it is repriced every 6 months, based on 6-month LIBOR.Simultaneously, the bank took in a 3-year deposit that is repriced every 3 months, based on 3-month LIBOR.
The bank is concerned about interest rates during the 3-month period that begins 3 months from today.Barclays decides to use an FRA to hedge its interest rate exposure.
The initial loan rate is 8% and the initial deposit rate is 6%, so the bank makes a 2 percentage point spread. There are 91 days in the 3-month period that begins 3 months from today.
a.)Identify the nature of the bank's interest rate risk, the agreement rate, and whether the bank is the buyer or the seller of the Forward Rate Agreement. (There is nothing to calculate for this part.)
b.)Draw a time line that illustrates the nature of the risk that Barclays confronts and when the FRA payment is made.
c.)If the actual 3-month LIBOR rate 3 months from today is 7.00%, does the bank pay or receive? What is the amount of the payment?
2.)Today, Citibank made a $5,000,000 loan to Kramerica Industries, an entrepreneurial firm founded and run by Cosmo Kramer.The loan's maturity is 2 years, and it is repriced every 3 months, based on 3-month LIBOR.Simultaneously, the bank took in a 3-year deposit that is repriced every 6 months, based on 6-month LIBOR.
The bank is concerned about interest rates during the 3-month period that begins 3 months from today.Citibank decides to use an FRA to hedge its interest rate exposure.
The initial loan rate is 7% and the initial deposit rate is 5%, so the bank makes a 2 percentage point spread. There are 92 days in the 3-month period that begins 3 months from today.
a.)Identify the nature of the bank's interest rate risk, the agreement rate, and whether the bank is the buyer or the seller of the Forward Rate Agreement. (There is nothing to calculate for this part.)
b.)Draw a time line that illustrates the nature of the risk that Citibank confronts and when the FRA payment is made.
c.)If the actual 3-month LIBOR rate 3 months from today is 8.00%, does the bank pay or receive? What is the amount of the payment?
Expert Answer:
Barclays utilized a structural hedge to manage interest rate risk aiming to smooth net interest inco... View the full answer
