Chapter 15 – Forward, Futures, and Swap Contracts
Exhibit 15.16
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the
Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second
payment will be based will be undesirable. (The amount of Chimichango’s first payment will be known at origination.) To
reduce the company’s interest rate exposure, you decide to purchase a 3 6 FRA whereby you pay the dealer’s quoted
fixed rate of 5.91 percent in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her
exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85 percent. (Assume a notional principal
of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
128. Refer to Exhibit 15.16. Assuming that three-month LIBOR is 5.6 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and
Chimichango.
a.
The dealer is obligated to pay Chimichango $38,750.
b.
The dealer is obligated to pay Chimichango $31,250.
c.
Chimichango is obligated to pay the dealer $38,750.
d.
Chimichango is obligated to pay the dealer $31,250.
e.
Chimichango is obligated to pay the dealer $0
129. Refer to Exhibit 15.16. Assuming that three-month LIBOR is 5.6 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and Chimichango.
a.
The dealer is obligated to pay Chimichango $38,215.00
b.
The dealer is obligated to pay Chimichango $30,818.54.
c.
Chimichango is obligated to pay the dealer $31,818.54.
d.
Chimichango is obligated to pay the dealer $38,215.00
e.
Chimichango is obligated to pay the dealer $0
130. Refer to Exhibit 15.16. Assuming that three-month LIBOR is 5.6 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Megabuks.
a.
b.
c.
d.
e.
131. Refer to Exhibit 15.16. Assuming that three-month LIBOR is 5.6 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and Megabuks.
a.
The dealer is obligated to pay Megabuks $38,215.00
b.
Megabuks is obligated to pay the dealer $31,818. 54.
c.
Megabuks is obligated to pay the dealer $38,215.00
d.
The dealer is obligated to pay Megabuks $30,818.54
e.
The dealer is obligated to pay Megabuks $0.
132. Refer to Exhibit 15.16. How much compensation does the dealer receive for transaction costs, credit risk, and other
costs associated with matching the FRAs?
Chapter 15 – Forward, Futures, and Swap Contracts
a.
$30,000
b.
$31,250
c.
$7,500
d.
$5,000
e.
$0
Exhibit 15.17
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The Skalmory Corporation has entered into a three-year interest rate swap, with semiannual settlement, to pay a fixed rate
of 7.5 percent per year and receive six-month LIBOR. The notional principal is $10,000,000.
133. Refer to Exhibit 15.17. Assume that one year later the fixed rate on a new two-year receive fixed pay floating LIBOR
swap has fallen to 7 percent per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on
$100 face value.
a.
$101.33
b.
$100.58
c.
$100.00
d.
$98.67
e.
$95.83
134. Refer to Exhibit 15.17. Assuming that one year after the swap was initiated the fixed rate on a new two-year receive
fixed pay floating LIBOR swap has fallen to 7 percent per year, calculate the market value of the 7.5 percent fixed rate
bond based on a $100 face value. Settlement is on a semiannual basis.
Chapter 15 – Forward, Futures, and Swap Contracts
a.
$101.33
b.
$100.92
c.
$100.00
d.
$98.67
e.
$95.83
135. Refer to Exhibit 15.17. What is the market value of the swap to the Skalmory Corporation?
a.
−$9,000,000
b.
−$1,804,000
c.
−$87,654
d.
$91,830
e.
$7,620,000
Exhibit 15.18
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is
concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 6 FRA whereby
the corporation pays the dealer’s quoted fixed rate of 3.5 percent in exchange for receiving three-month LIBOR at the
settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3 percent. The
notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
136. Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and TexMex.
a.
The dealer is obligated to pay TexMex $61,881.
Chapter 15 – Forward, Futures, and Swap Contracts
b.
The dealer is obligated to pay TexMex $61,500.
c.
TexMex is obligated to pay the dealer $247,524.
d.
TexMex is obligated to pay the dealer $246,000.
e.
TexMex is obligated to pay the dealer $258,000.
137. Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.
a.
The dealer is obligated to pay TexMex $61,881.
b.
The dealer is obligated to pay TexMex $61,500.
c.
TexMex is obligated to pay the dealer $247,524.
d.
TexMex is obligated to pay the dealer $246,000.
e.
TexMex is obligated to pay the dealer $56,000.
138. Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Newport.
a.
The dealer is obligated to pay Newport $125,000.
b.
The dealer is obligated to pay Newport $115,000.
c.
Newport is obligated to pay the dealer $125,000.
d.
Newport is obligated to pay the dealer $115,000.
e.
Newport is obligated to pay the dealer $105,000.
139. Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.00 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and Newport.
a.
The dealer is obligated to pay Newport $123,762.
b.
The dealer is obligated to pay Newport $125,000.
c.
Newport is obligated to pay the dealer $125,000.
d.
Newport is obligated to pay the dealer $123,762.
e.
Newport is obligated to pay the dealer $132,762.
140. Refer to Exhibit 15.18. How much compensation does the dealer receive for transaction costs, credit risk, and other
costs associated with matching the FRAs?
a.
$42,700
b.
$62,500
c.
$82,000
d.
$96,300
e.
$0
Exhibit 15.19
Chapter 15 – Forward, Futures, and Swap Contracts
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The WallMal Company has entered into a four-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8
percent per year and receive six-month LIBOR. The notional principal is $50,000,000.
141. Refer to Exhibit 15.19. Assume that one year later the fixed rate on a new three-year receive fixed pay floating
LIBOR swap has fallen to 7 percent per year. Settlement is on a semiannual basis. Calculate the market value of the FRN
based on $100 face value.
a.
$102.66
b.
$100.00
c.
$95.56
d.
$89.63
e.
$70.77
142. Refer to Exhibit 15.19. Assuming that one year after the swap was initiated the fixed rate on a new three-year receive
fixed pay floating LIBOR swap has fallen to 7 percent per year, calculate the market value of the 8 percent fixed rate bond
based on a $100 face value. Settlement is on a semiannual basis.
a.
$102.66
b.
$100.00
c.
$95.56
d.
$89.63
e.
$70.77
143. Refer to Exhibit 15.19. Indicate the market value of the swap to the WallMal Company.
Chapter 15 – Forward, Futures, and Swap Contracts
a.
$3,525,120
b.
−$3,500,000
c.
$1,332,150
d.
−$1,332,150
e.
$1,026,600
144. Refer to Exhibit 15.159 Assume that one year later the fixed rate on a new three-year receive fixed pay floating
LIBOR swap has risen to 9 percent per year. Settlement is on a semiannual basis. Calculate the market value of the FRN
based on $100 face value.
a.
$97.42
b.
$100.00
c.
$92.56
d.
$99.63
e.
$75.77
145. Refer to Exhibit 15.19. Assume that one year after the swap was initiated the fixed rate on a new three-year receive
fixed pay floating LIBOR swap has risen to 9 percent per year, calculate the market value of the 8 percent fixed rate bond
based on $100 face value. Settlement is on a semiannual basis.
a.
$76.45
b.
$101.24
c.
$100.0
d.
$97.42
e.
$70.77
146. Refer to Exhibit 15.19. Indicate the market value of the swap to the WallMal Company.
a.
$5,786,345
b.
−$3,575,987
c.
$1,289,450
d.
−$1,514,900
e.
$1,250,075
Exhibit 15.20
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An international investment firm buys an interest rate swap that pays the difference between LIBOR and 6 percent if
LIBOR exceeds 6 percent. Current LIBOR is 5 percent. The amount of the option is $1,500,000, and the settlement is
every three months. Assume a 360-day year.
147. Refer to Exhibit 15.20. Find the payoff if LIBOR closes at 4.7 percent.
a.
−$45,000
b.
−$11,250
c.
$0
d.
$11,250
e.
$45,000
148. Refer to Exhibit 15.20. Find the payoff if LIBOR closes at 6.3 percent.
a.
−$45,000
b.
−$11,250
c.
$0
d.
$11,250
e.
$45,000