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  • @note 5 - Exercise

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    zZl3Ul2NNINGZz
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    The document discusses a company receiving $1M in the next 90 days that the CFO plans to invest for 3 months. It presents an option for the CFO to use a 3x6 forward rate agreement (FRA) offered at 5.30%/5.32% to hedge against the risk that interest rates will decline as expected by December. Using the FRA would provide a payoff on the settlement date based on the difference between the contracted and realized interest rates.

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    @Note 5 - Exercise

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    The document discusses a company receiving $1M in the next 90 days that the CFO plans to invest for 3 months. It presents an option for the CFO to use a 3x6 forward rate agreement (FRA) offered at 5.30%/5.32% to hedge against the risk that interest rates will decline as expected by December. Using the FRA would provide a payoff on the settlement date based on the difference between the contracted and realized interest rates.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    9 views1 page

    @note 5 - Exercise

    Uploaded by

    zZl3Ul2NNINGZz
    The document discusses a company receiving $1M in the next 90 days that the CFO plans to invest for 3 months. It presents an option for the CFO to use a 3x6 forward rate agreement (FRA) offered at 5.30%/5.32% to hedge against the risk that interest rates will decline as expected by December. Using the FRA would provide a payoff on the settlement date based on the difference between the contracted and realized interest rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    Exercise

    • On September 15, 2016, a company will receive $ 1M in the next


    3 month (90 day).

    • The CFO plans to invest this money for 3 month but he thinks the
    interest rate will be lower in December.

    • Suppose a bank offers 3x6 FRA @ 5.30%/5.32% (pa), payment


    made on settlement date based on 30/365.

    • Also suppose that the reference (risk-free) interest rate on


    December 15 declines, as expected, to 4.8% (pa).

    • How can CFO use FRA to hedge the interest rate risk?

    • What is the payoff on the settlement date?

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