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In January, the startup company, Moses Tablets, received a $200 million loan for one year from Banco Federal bank with the following terms: - The
In January, the startup company, Moses Tablets, received a \$200 million loan for one year from Banco Federal bank with the following terms: - The interest payments received from the loan are due every six months. - The interest rate for the first 6 months is known. - The interest rate for the SIX-MONTH period from July 1st until December 31 st will be determined on July 1st. at the 3-month commercial paper spot rate. There are no futures contracts on 3-month commercial papers, but there are futures contracts with a delivery date of September 21 on: - \$1 million 3-month SOFR (secured overnight financing rate), - \$1 million 3-month Bloomberg Short-term Bank Yield Index (BSBY). In March, the firm decides to hedge its interest risk and estimates the following regressions for the hedging period: You are the CFO of Alberto Innovations. Design the optimal hedge and explain. Now, suppose that you are the treasurer of Banco Federal above. The bank has arranged financing for the loan for the entire year at a fixed interest rate. That is, the entire cost of financing the loan for one year is known. In January, when your bank provided the loan above interest rates were high. However, interest rates have stated to fall, and, in March, you become concerned about a decrease in your interest income form the loan. Again, the loan rate from July 1st until December 31st will be determined on July 1st. at the 3-month commercial paper spot rate. Assume that all the data above (including the regressions) remain the same. Design the optimal hedge for the BANK and explain. In January, the startup company, Moses Tablets, received a \$200 million loan for one year from Banco Federal bank with the following terms: - The interest payments received from the loan are due every six months. - The interest rate for the first 6 months is known. - The interest rate for the SIX-MONTH period from July 1st until December 31 st will be determined on July 1st. at the 3-month commercial paper spot rate. There are no futures contracts on 3-month commercial papers, but there are futures contracts with a delivery date of September 21 on: - \$1 million 3-month SOFR (secured overnight financing rate), - \$1 million 3-month Bloomberg Short-term Bank Yield Index (BSBY). In March, the firm decides to hedge its interest risk and estimates the following regressions for the hedging period: You are the CFO of Alberto Innovations. Design the optimal hedge and explain. Now, suppose that you are the treasurer of Banco Federal above. The bank has arranged financing for the loan for the entire year at a fixed interest rate. That is, the entire cost of financing the loan for one year is known. In January, when your bank provided the loan above interest rates were high. However, interest rates have stated to fall, and, in March, you become concerned about a decrease in your interest income form the loan. Again, the loan rate from July 1st until December 31st will be determined on July 1st. at the 3-month commercial paper spot rate. Assume that all the data above (including the regressions) remain the same. Design the optimal hedge for the BANK and explain
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