As part of its future liability financing strategy, your employer seeks to borrow $25 million in the

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Question:

As part of its future liability financing strategy, your employer seeks to borrow $25 million in the next 90 days and has contracted to borrow at a 90-day London Interbank Offer Rate (LIBOR) of 4.75% plus 75 basis points. The lending bank will charge a commitment fee (or compensating balance) of $75,000 today in order to secure this forward loan contract. This loan is due to pay back in full in 6 months (i.e., 180 days).

As part of the risk management group of your firm, evaluate the strategic risk of your firm’s future financing plan and justify your analysis. Assume LIBOR could increase to 10% or decrease to 2% (with increments of 50 basis points) when your firm takes out the loan, that is, 90 days from now.