Consider the following interest rate swap between two financial institutions A and B: the notional value...
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Consider the following interest rate swap between two financial institutions A and B: the notional value is $500,000,000, the fixed rate is 4.5%, the floating rate is the 6 month LIBOR and the maturity is 5 years. A pays fixed and B receives. a. What is the cash flow at time 0 (i.e. the date the swap contract is signed)? 1 marks Assume that 6 months from now, the 6 month LIBOR is 3.85%. What is the net cash flow between A and B? (Make sure to specify which of A and B is paying and which is receiving, not just the cash flow amount.) 2 marks b. Gotham Bank's assets consist mostly of long term mortgages, and its liabilities consist of customer deposits (both checking accounts and short term money market securities (GICs)). Explain why Gotham is exposed to interest rate risk. Would entering a swap be an appropriate way to hedge that exposure? Would Gotham be paying fixed or receiving? 2 marks Consider the following interest rate swap between two financial institutions A and B: the notional value is $500,000,000, the fixed rate is 4.5%, the floating rate is the 6 month LIBOR and the maturity is 5 years. A pays fixed and B receives. a. What is the cash flow at time 0 (i.e. the date the swap contract is signed)? 1 marks Assume that 6 months from now, the 6 month LIBOR is 3.85%. What is the net cash flow between A and B? (Make sure to specify which of A and B is paying and which is receiving, not just the cash flow amount.) 2 marks b. Gotham Bank's assets consist mostly of long term mortgages, and its liabilities consist of customer deposits (both checking accounts and short term money market securities (GICs)). Explain why Gotham is exposed to interest rate risk. Would entering a swap be an appropriate way to hedge that exposure? Would Gotham be paying fixed or receiving? 2 marks
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Answer rating: 100% (QA)
a The cash flow at time 0 when the swap contract is signed can be calculated by considering the noti... View the full answer
Related Book For
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
Posted Date:
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