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Exercise 7: Few months ago, a company issued a floating rate bond with 40 million principal amount. This bond will be repaid in three years
Exercise 7: Few months ago, a company issued a floating rate bond with 40 million principal amount. This bond will be repaid in three years and its coupon rate is equal to 3-month Euribor +25bps. At the last payment date (one month ago), the 3-month Euribor rate was 0.935% pa. The treasurer fears a rise in the money market rates and is worried about the coupon which will be paid 5 months later. The current 2-month and 5-month Euribor rates are 0.820% and 1.228% respectively. The bank quotes for a 25 FRA are 1.490% - 1.510\%. Explain why a forward-forward transaction is not suited to hedge the current situation. Determine the position the treasurer should take on the FRA to hedge his position. Two months later, the observed 3-month Euribor rate is 1.500%. Determine the result of the hedged position
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