Sfm problem

GURBACHAN SHARMA (Student CA Final ) (30 Points)

29 March 2017  
Please keep four decimals for all FX rates, interest rates and rate of inflation, and two decimals for all dollar/foreign currency amounts. Note: each question contains references to corresponding chapter and, often, page numbers which cover similar or related example. Problem 1. Seller has made a “six against nine” Forward Rate Agreement (FRA), with buyer, with the following characteristics: notional amount = $1,000,000 settlement rate = 1.0% agreement rate = 0.2% actual number of days in the three-month agreement period = 91 a) Who pays whom? b) What is the dollar amount of the settlement? c) When is the contract settled? Problem 2. Your firm issued five-year floating-rate notes indexed to six-month euro-LIBOR plus 1% one year ago. Coupon payments are made semi-annually. At the time of issuance, the six-month LIBOR was 0.3%, after six months it was 5%. What is the euro amount of the first and second coupon payments your firm paid per EUR1,000 of face value? Reminder: LIBOR is quoted representing fixed time periods ranging from 30 days to 360 days. Problem 3. Edmonton Inc. issued a dual-currency bond that pays CAD 1,100 at maturity per USD1,000 of par value. The company’s cash flows are exclusively in Canadian dollars. a) What is the implicit CAD/USD exchange rate at maturity? b) Will the company be better or worse off if the actual exchange rate at maturity is CAD/.1200? Problem 4. The following information is given: fixed rate $ (%) floating rate euro (%) Boeing 2.2% LIBOR + 1.00% (LIBOR + 0.6%) Airbus 2.5% LIBOR + 0.50% Boeing and Airbus have agreed to swap their debt payments directly without the intervention of an intermediary to hedge foreign exchange risk. Each firm will save the same amount in percentage terms. a) What are the total interest savings available in this cross currency interest rate swap? b) What rate will Boeing pay on floating rate Euro debt after the swap? c) What rate will Airbus pay on fixed rate USD debt after the swap? d) Determine the fixed interest rate on Airbus’ dollar debt that would make a swap no longer beneficial. Problem 5. ABC Corporation has entered into a ten-year interest rate swap with a swap bank. ABC Corp. pays the swap bank a fixed-rate of 3 percent annually on a notional amount of EUR100,000,000 and receives LIBOR - ½ percent. What is the price of the swap on the seventh reset date, assuming that the fixed-rate at which ABC can borrow has decreased to 2 percent.