i. ii. b) Robeck Bank seeks interest rate protection on a borrowing for a nine-month period...

Transcribed Image Text:

i. ii. b) Robeck Bank seeks interest rate protection on a borrowing for a nine-month period beginning three months' time. The amount of proposed borrowing is £100,000,000 and forecasts are for an increase in rates over the period of the borrowing, which is on three LIBOR month basis. They get the following quotes from two FRA dealers. DEALER 1 3 v. 6 6 v. 9 9 v. 12 6 v. 12 2.68-2.69 2.71-2.72 2.78-2.79 2.65-2.69 DEALER 2 3 v. 6 6 v.9 9 v. 12 6 v. 12 2.69-2.70 2.73-2.75 2.76-2.77 2.67-2.68 Set up the interest rate hedge using the appropriate dealer(s), the rate(s) and the relevant FRA hedge terminology. An arbitrage dealer has calculated the theoretical rate for 6 v 12 FRA as 2.32%. They observe that the current rates on the money market are as follows: (3 marks) Interest Rates on the Money Market 6 month interest rates 2.66-2.99% p.a. 12 month interest rates 2.70-3.00% p.a. Based on the 6 v 12 quotes from the dealers above calculate the maximum arbitrage profit if you have a dealing limit of £100 million. (6 marks) i. ii. b) Robeck Bank seeks interest rate protection on a borrowing for a nine-month period beginning three months' time. The amount of proposed borrowing is £100,000,000 and forecasts are for an increase in rates over the period of the borrowing, which is on three LIBOR month basis. They get the following quotes from two FRA dealers. DEALER 1 3 v. 6 6 v. 9 9 v. 12 6 v. 12 2.68-2.69 2.71-2.72 2.78-2.79 2.65-2.69 DEALER 2 3 v. 6 6 v.9 9 v. 12 6 v. 12 2.69-2.70 2.73-2.75 2.76-2.77 2.67-2.68 Set up the interest rate hedge using the appropriate dealer(s), the rate(s) and the relevant FRA hedge terminology. An arbitrage dealer has calculated the theoretical rate for 6 v 12 FRA as 2.32%. They observe that the current rates on the money market are as follows: (3 marks) Interest Rates on the Money Market 6 month interest rates 2.66-2.99% p.a. 12 month interest rates 2.70-3.00% p.a. Based on the 6 v 12 quotes from the dealers above calculate the maximum arbitrage profit if you have a dealing limit of £100 million. (6 marks)

Answer rating: 100% (QA)

i Robe c k Bank would set up the interest rate hedge using Deale... View the full answer