Exercise 1 An industrial Company located in Milan prepared an offer to a customer in Lyon for 1,000,000 EUR. In order to be able to get that project, the Italian Co. needs to first spend 500,000 EUR in it (raw material, workforce...), now. Since the Italian Co. has some problems of liquidity, they decide to get a loan. The conditions of that loan are: -Loan: 500,000 EUR - Interest rate: Euribor + 0.5% - Maturity period: 4 years Loan to be paid back in constant monthly payments (to be revised every year) during the next four years Question 1a: what is the monthly payment the Italian company will have to pay back to the bank during the first year? (Euribor today is 4.2%) (10p) Question 1b: the Italian Company fears that next year the Euribor rises too much. If they are offered a collar contract with Max=5% and rmin=2%, what is the monthly payment the Italian company will have to pay back to the bank next year if Euribor rises to 4.4%? (10p) Question 1c: Still in the scenario described in the previous question (with the collar contract in force), what is the monthly payment the Italian company should pay back to the bank next year if Euribor drops to 1% next year (instead of rising as described in Q2b)? (10p) Exercise 2 An industrial Company located in Munich prepared an offer to a customer in Milan for 2,000,000 EUR. In order to be able to get that project, the German Co. needs to first spend 500,000 EUR in it (raw material, workforce...) now. Since the German Co. has some problems of liquidity, they decide to get a loan. The conditions of that loan are: -Loan: 500,000 EUR - Interest rate: 6% - Maturity period: 3 years - Loan to be paid back in constant monthly payments during the next three years Question 2a: what is the monthly payment the German company will have to pay back to the bank? And how much will they have paid back in total at the end of the maturity period (after those three years)? (15p) Question 2b: what is the debt of the German company with the bank after having paid the first 12 payments? (10p) Question 2c: If the German company agrees on a waiting period for the first 12 months with the bank, what is the debt the German company will have with the bank at the end of that waiting period? (15p) Question 2d: Still in the scenario described in the previous question (with the agreed waiting period), what is the monthly payment the company will have to pay back to the bank from month 13 onwards? And how much will they have paid back in total at the end of the maturity period? (10p) Exercise 3 An industrial Company located in Lyon will need 500,000 EUR next year. If they got the loan today, the interest rate the bank offers is 6% and the loan is to be paid back in only one payment after one year. Since the finance manager of that French company fears that next year (when the Co. will get the loan) the interest rate will rise, the Co. accepts a Forward Interest Rate Agreement for a 7% Question 3a: In case that, on the settlement date (next year), the interest rate rises to 6.5%, how much money will the French company gain/loose with this FRA agreement? (10p) Question 3b: In case that, on the settlement date (next year), the interest rate rises up to 7.6%, how much money will the French company gain/loose with this FRA agreement? (10p)