Audi has a $20 million Eurodollar deposit maturing in two months that it plans to roll...

   

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Audi has a $20 million Eurodollar deposit maturing in two months that it plans to roll over for a further six months. The company's treasurer feels that interest rates will be lower in two months' time when rolling over the deposit. Suppose the current LIBOR 6 month rate is 7.875%. a. Explain how Audi can use a forward rate agreement (FRA) at 7.65% from Banque Paribas to lock in a guaranteed six-month deposit rate when it rolls over its deposit in two months. b. After two months, LIBOR 6 month rate has fallen to 7.5%. How much will Audi receive/pay on its FRA? What will be Audi's hedged deposit rate for the next six-month period? c. In two months, the LIBOR 6 month rate has risen to 8%. How much will Audi receive/pay on its FRA? What will be Audi's hedged deposit rate for the next six months? Audi has a $20 million Eurodollar deposit maturing in two months that it plans to roll over for a further six months. The company's treasurer feels that interest rates will be lower in two months' time when rolling over the deposit. Suppose the current LIBOR 6 month rate is 7.875%. a. Explain how Audi can use a forward rate agreement (FRA) at 7.65% from Banque Paribas to lock in a guaranteed six-month deposit rate when it rolls over its deposit in two months. b. After two months, LIBOR 6 month rate has fallen to 7.5%. How much will Audi receive/pay on its FRA? What will be Audi's hedged deposit rate for the next six-month period? c. In two months, the LIBOR 6 month rate has risen to 8%. How much will Audi receive/pay on its FRA? What will be Audi's hedged deposit rate for the next six months?

Answer rating: 100% (QA)

a Audi can use a forward rate agreement FRA with Banque Paribas at a rate of 765 to lock in a guaranteed sixmonth deposit rate when it rolls over its ... View the full answer