You are the CFO of CU Tech. Your company needs short-term borrowings to fund its net...

Transcribed Image Text:

You are the CFO of CU Tech. Your company needs short-term borrowings to fund its net working capital investments. Your house bank, HSBC, offers you a short-term USD credit with the rate tied to LIBOR + 100 basis points. You plan to borrow USD 10 million 30 days later for 90 days. (a) Describe how to use an FRA to lock in the rate on the loan. (2 marks) (b) Suppose your FRA contract in part (a) is quoted at 6.0% p.a., what is the borrowing rate on the loan? (2 marks) (c) 30 days later, LIBOR turns out to be 7.5% p.a. What is the payoff of the FRA contract? (5 marks) (d) 30 days later, how much should you draw from the USD credit line? (2 marks) (e) How much will you repay HSBC in 90 days? (4 marks) (f) Verify the CU Tech's effective borrowing rate is the same as part (b) if LIBOR in 30 days is 7.5% p.a. (2 marks) You are the CFO of CU Tech. Your company needs short-term borrowings to fund its net working capital investments. Your house bank, HSBC, offers you a short-term USD credit with the rate tied to LIBOR + 100 basis points. You plan to borrow USD 10 million 30 days later for 90 days. (a) Describe how to use an FRA to lock in the rate on the loan. (2 marks) (b) Suppose your FRA contract in part (a) is quoted at 6.0% p.a., what is the borrowing rate on the loan? (2 marks) (c) 30 days later, LIBOR turns out to be 7.5% p.a. What is the payoff of the FRA contract? (5 marks) (d) 30 days later, how much should you draw from the USD credit line? (2 marks) (e) How much will you repay HSBC in 90 days? (4 marks) (f) Verify the CU Tech's effective borrowing rate is the same as part (b) if LIBOR in 30 days is 7.5% p.a. (2 marks)

Answer rating: 100% (QA)

Answer a To lock in the rate on the loan using a Forward Rate Agreement FRA CU Tech can enter into an agreement with a counterparty such as a bank or ... View the full answer