Case Study:

The treasury team of XYZ bank is expecting the interest rates to increase in near future and hence decrease in the investment portfolio. The average YTM of the bonds in its portfolio is 8% and it is expecting it to go up to 9%. The three months Libor is currently quoted at 0.25

I) This bank has entered into a 3x9 month forward. The three months MIBOR is 4% and 1 year MIBOR is at 5%. At what price the bank should quote this forward to the client? The markup spread of the bank is 1%.