Question
A firm will receive $400M in 4 months for selling a branch of the company. They plan on sitting on the cash value for 8
A firm will receive $400M in 4 months for selling a branch of the company. They plan on sitting on the cash value for 8 months. They will invest the $400M in a bank account. After that period of 8 months, they will use the proceed and reinvest in the firm. They face interest rate risk between today and 4 months. They will enter in a FRA. Below are the relevant zero-rates in continuous time.
(a) What is the name o the FRA (aXb)?
(b) What if the forward rate used for this FRA?
(c) At the maturity of the FRA. Calculate the payment made to the firm, or by the firm for these three scenarios: [c.1] Zero-rate = 3.00%, [c.2] Zero-rate = 4.00%, and [c.3] Zero-rate = 5.00% (all in continuous time).
Month | Zero-rate Continuous time (%) |
1 | 2.00 |
2 | 2.50 |
3 | 2.90 |
4 | 3.20 |
5 | 3.45 |
6 | 3.65 |
7 | 3.80 |
8 | 3.90 |
9 | 3.95 |
10 | 3.95 |
11 | 3.96 |
12 | 3.97 |
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