The year is 2018 and you are a credit analyst at a bank. Your treasury funding...

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The year is 2018 and you are a credit analyst at a bank. Your treasury funding desk has an opportunity to do forward rate transactions with M&T Bank and wants to set up a trading limit. Limit: $1,000,000 credit exposure limit Scope: One year forward rate agreement Summary: At any time, your trading desk might enter into an FRA with M&T Bank. 1. Describe a forward rate agreement. How can it change in value over time? What scenarios and notional values are necessary to create an exposure of $1,000,000? 2. Is the amount of the limit reasonable? That is, can M&T pay the limit amount? What information in the financial statement can you use to decide? Would your decision change if you consider that 10 other parties have the same contract you have with M&T Bank? What about 100 other parties? 3. What market conditions could cause the amount of credit exposure to increase? Describe both interpretations: pay fixed, pay floating. The year is 2018 and you are a credit analyst at a bank. Your treasury funding desk has an opportunity to do forward rate transactions with M&T Bank and wants to set up a trading limit. Limit: $1,000,000 credit exposure limit Scope: One year forward rate agreement Summary: At any time, your trading desk might enter into an FRA with M&T Bank. 1. Describe a forward rate agreement. How can it change in value over time? What scenarios and notional values are necessary to create an exposure of $1,000,000? 2. Is the amount of the limit reasonable? That is, can M&T pay the limit amount? What information in the financial statement can you use to decide? Would your decision change if you consider that 10 other parties have the same contract you have with M&T Bank? What about 100 other parties? 3. What market conditions could cause the amount of credit exposure to increase? Describe both interpretations: pay fixed, pay floating.

Answer rating: 100% (QA)

1 A forward rate agreement FRA is a financial contract between two parties to exchange cash flows based on a specified interest rate known as the forw... View the full answer