Todays LIBOR term structure is 30 days 60 days 90 days 120 days 150 days 180 days
Question:
Today’s LIBOR term structure is 30 days 60 days 90 days 120 days 150 days 180 days 3.10% 3.25% 3.30% 3.50% 3.55% 3.70% Our firm would is interested in locking in an interest rate today such that we could lend $100,000 in 4 months, with the borrower paying us principal and interest 6 months from today.
a) Describe a set of LIBOR transactions today that will replicate the desired payoffs. Replicate those cash flows with the available assets. You won’t know the payoff amount to start.
b) What forward interest rate did your transactions lock in for the firm?
c) Describe the FRA position that these transactions replicate: A ____ position in a __ x ___ FRA.
d) Assume that instead of replicating it, you entered the FRA position you described in part c), with a notional amount of $100,000. If you would prefer to settle in cash at expiration, how much will you pay or receive if the relevant LIBOR rate at expiration is 3.5%?
Expert Answer:
