World Scanners, Inc. is a U.S. corporation that occasionally undertakes short-term borrowings in U.S. dollars with the rate tied to LIBOR. The 90-day LIBOR on 18 May is 6 percent. The company determines on this day that it will borrow $10 million at LIBOR plus 200 basis points on 15 July. The loan will be a pure discount loan to be repaid with a single payment of principal and interest 90 days later. To protect against increases in LIBOR between 18 May and 15 July, the company buys a call option on LIBOR with an exercise rate of 5.5 percent to expire on 15 July, with the underlying being 90-day LIBOR. The call premium is $25,000.

how much is the effective loan rate if the LIBOR on 15 July is 0.075  
How much is the effective loan rate if the LIBOR on 15 July is 0.09

Answer rating: 100% (QA)

To calculate the effective loan rate we need to consider the borrowing rate and the cost of the call ... View the full answer