Your firm needs to issue 3 months Bills in 6 months to borrow $5M. The firm...

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Your firm needs to issue 3 months Bills in 6 months to borrow $5M. The firm is concerned about possible rises in interest rates. You are asked to set up a hedging strategy using a FRA. How would you set up the strategy? Now the LIBOR spot rates are: 3 months = 2.75%, 6 months = 2.95%, 9 months = 3.1%, 12 months = 3.15%. Ex-post, you observe that the 3 months LIBOR in 3, 6, 9, and 12 months are 2.8%, 2.9%, 2.6%, and 2.5%, respectively. What will the payoff from the FRA be? What will the effective cost of borrowing be? Your firm needs to issue 3 months Bills in 6 months to borrow $5M. The firm is concerned about possible rises in interest rates. You are asked to set up a hedging strategy using a FRA. How would you set up the strategy? Now the LIBOR spot rates are: 3 months = 2.75%, 6 months = 2.95%, 9 months = 3.1%, 12 months = 3.15%. Ex-post, you observe that the 3 months LIBOR in 3, 6, 9, and 12 months are 2.8%, 2.9%, 2.6%, and 2.5%, respectively. What will the payoff from the FRA be? What will the effective cost of borrowing be?

Answer rating: 100% (QA)

To hedge against a possible rise in interest rates the firm can use a Forward Rate Agreement FRA A FRA is a contract where the buyer agrees to pay a f... View the full answer