4. CBA company signed a contract to sell $5 million equipment now with delivery in 8 months. CBA will outsource this equipment to a partner, and the partner will starts building 3months from now. The payment for the outsourcing is due 5 months from now. Thus, CBA needs to finance the $5 million until the receivable comes in. Assuming current interest rate is 5% for CBA, and assume the Fed is likely to increase interest rate 1-2 times in the next 5 months. As a result, CBA comes to you for advice on interest rate hedging. 4a (5 points). You found that 3-5 forward rate agreement (FRA), 3-8 FRA, and 5-8 FRA at 5% are available. Which one should you suggest to CBA? 4b (10 points) If the interest rate goes up by 0.5% to 5.5% when CBA borrows $5 million, what are the hedging result from FRA and CBA's net cost for this loan? 4c (10 points). If the implied LIBOR is 2.8% now, and the implied LIBOR will be 3.35% (0.550 increase) when CBA borrows $5 million. Assuming CBA can find the interest rate futures contracts with the same maturity date, and we can ignore the daily cash settlement, how much will CBA pay or receive from the interest rate futures contracts? Hint: each interest rate futures contract has $1 million underlining assets, and the price of the contract is $100 X (1 - implied LIBOR). 4. CBA company signed a contract to sell $5 million equipment now with delivery in 8 months. CBA will outsource this equipment to a partner, and the partner will starts building 3months from now. The payment for the outsourcing is due 5 months from now. Thus, CBA needs to finance the $5 million until the receivable comes in. Assuming current interest rate is 5% for CBA, and assume the Fed is likely to increase interest rate 1-2 times in the next 5 months. As a result, CBA comes to you for advice on interest rate hedging. 4a (5 points). You found that 3-5 forward rate agreement (FRA), 3-8 FRA, and 5-8 FRA at 5% are available. Which one should you suggest to CBA? 4b (10 points) If the interest rate goes up by 0.5% to 5.5% when CBA borrows $5 million, what are the hedging result from FRA and CBA's net cost for this loan? 4c (10 points). If the implied LIBOR is 2.8% now, and the implied LIBOR will be 3.35% (0.550 increase) when CBA borrows $5 million. Assuming CBA can find the interest rate futures contracts with the same maturity date, and we can ignore the daily cash settlement, how much will CBA pay or receive from the interest rate futures contracts? Hint: each interest rate futures contract has $1 million underlining assets, and the price of the contract is $100 X (1 - implied LIBOR)