Today is December 1 st and the current 90-day bank bill rate is 10%. Your accounting team
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Question:
Today is December 1st and the current 90-day bank bill rate is 10%. Your accounting team has discovered that you will have a cash flow shortage over the first quarter of next year. As such you will have to borrow $1,000,000 for three months from January 1st. As you are concerned about interest rate risk you have gone to your bank and asked them for a solution. They have offered you a loan with the interest rate capped at 11% that you can choose to use if the going bank bill interest rate is higher when it comes time for you to borrow on January 1st.
- a). Show how this hedge would work if the going bank bill rate is 12% on January 1st. Show all cash flows.
- b). Show how this hedge would work if the going bank bill rate is 8% on January 1st.
- c). Discuss the difference between a forwards/futures and options? What are the relative advantages and disadvantages of each?
Related Book For
Management information systems
ISBN: 978-0073376813
10th edition
Authors: James A. O Brien, George M. Marakas
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