10th February 2020 a UK company Bellingham Inc. exported a consignment of aircraft parts to a US airline company. Bellingham was set to receive payment in two instalments of US dollars. The payments were set to occur on the following dates: $1.5 million on 10th March 2020 $2.7 million on 10th April 2020 $3.8 million on 10th June 2020 Bellingham Inc. also has US dollar-denominated trade debts and plans to use proceeds from the polypropylene fabric sale to pay these suppliers. The company’s Treasury has budgeted for estimates that 30% of the March payment to be held on account to pay creditors, 20% of the April payment and 50% of the June payment. Three years ago (10th February 2017) Bellingham borrowed $80 million via a six-year floating-rate, non-callable, note issue. The notes were sold at par ($100) and offer a coupon rate of $LIBOR plus 300 basis points. Interest is payable semi-annually on 10th February and 10th August. The coupon rate is based on the six-month $LIBOR at the start of each payment cycle.

1. Calculate:

1. The prices of the zero-coupon bonds listed in Table 4
2. The par coupon rates
3. The six month and annualised forward rates from the current yields

2. Use the relevant par coupon result to explain how Bellingham can use an interest rate swap to transform the remaining interest payments on the loan from variable rate to fixed rate payments. Specify the swap rate assuming that the counterparty bank deals on the basis of a swap spread of +/- 4 basis points.

3. Compare the swap rate with the current variable rate on Bellingham’s debt and outline the terms of the first settlement payment.

4. Explain the interest rate risk that Bellingham has the opportunity to hedge and discuss factors likely to influence the company’s decision to hedge or not.

[The discussion should focus on the specific market circumstances that Bellingham is operating in and not rely on general statements]

5. Show how the bank that is party to the swap could protect its earnings using forward rate agreements.

Market Data on 10^th February 2020

GBP/USD Spot Rate (Bid-Ask Spread): $1.3316 - $1.3321

Table 1: Money Market Interest Rates (%)
	One Month	Three Month	Six Month	One Year
Sterling	0.73 - 0.83	0.83 - 0.93	0.94 - 1.09	1.07 - 1.22
Dollar	2.38 - 2.68	2.50 - 2.80	2.57 – 2.87	2.74 – 3.04

Table 2: Sterling LIBORs (%)
One Month	Three Month	Six Month	One Year
0.729	0.860	0.995	1.136

Table 3: GBP/USD Currency Futures Prices (Contract Size £62,500)
Delivery Date	Price ($ per £)
11th March 2020	1.3331
8th April 2020	1.3340
6th May 2020	1.3360
10th June 2020	1.3384
8th July 2020	1.3410

Table 4: Zero-Coupon Bond Yields
Maturity Date	Yield (%)
10th August 2021	0.7595
10th February 2022	0.7695
10th August 2022	0.7731
10th February 2023	0.7817
10th August 2023	0.7932
10th February 2024	0.8005