Question 4

Question 4 (40 marks)

Assuming it is 1^st July today, and consider need to borrow $100,000,000 for 3 months from 1^st October to 30^th December. The prevailing fixed agreement rate is 8.00% p.a. while the floating Libor rate turned out to be 7.75% on 1^st October. Assuming there are 92 days between September 1 and December 30, and use actual / 360 convention.Use CFO to evaluate the cheapest net cost of interest for this 3 month borrowing for each of the following interest rate hedge instrument:

a)FRA contract

b)Eurodollar Futures

c)BAB Futures

d)Which hedge instrument provides the cheapest cost of interest?

(10 + 12 + 12 + 6 = 40 marks)