Problems Forward Loans and FRA 1. You have purchased 1 Eurobond at a price of Qo=94.13. You keep the contract for 5 days and then sell it. In the meantime, you observe the following settlement prices: {Q1 = 94.23, Q2 = 94.03, Q3 = 93.93, Q4 = 93.43, Q5 = 93.53} calculate the string of mark-to-market losses or gains. 2. The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73% and has lent funds for 6 months at 7.87%. a. Represent the exposure on cash flow diagrams. b. To cover his exposure created by the mismatch of maturities, the dealer signs a forward loan. Calculate this treasurer's breakeven forward rate on interest, assuming no other costs. c. Assume that instead, the treasurer decides to wait 3 months and take a spot loan then. To cover his exposure, the treasurer signs a 3x6 FRA. (i) Use cash ow diagrams to show how this achieves his goal. (ii) What is the settlement amount is the forward rate is 6.87%, the Libor rate on settlement date is 6.09%, and the amount the bank needed to cover the mismatch is 38million? 3. (harder. May be an EC in an exam) You are hired by a nancial company in New Zealand and you have instant access to markets. You would like to lock in a 3month borrowing cost in NZ$ for your client. You consider a NZ$ 1x4 FRA. But you nd that it is overpriced as the market is thin. So you turn to the Aussie. A3 FRAs are very liquid. It turns out that the A$ and NZ$ forwards are also easily available. Create a 1x4 NZ$ synthetic using a 1x4 A$ and nancial elements already discussed in class. 4. You are ' 'ven the followin information: 3x6 Forward rate 3.3-3.4% 6x9 Forward rate 3.63.7% a. Show how to construct a synthetic 9month loan with xed rate beginning with a 3 month loan. Plot the cash ow diagram. b. What is the xed 9-month borrowing cost? 5. If a bond expiring in one year, with face value of 100, is trading today for $95, and a similar bond expiring in two years is trading for $90, what should be the forward rate on a forward loan for $100 (to be received in one year, and paid back in two)?> If the Forward rate is 5%, what arbitrage strategy has positive prots? Make sure you are state exactly what happens in each period. 6. If the interest rates for deposits or loans are at at 5% (any length of time), what should be the forward rate on a forward loan for $100 (to be received in one year, and paid back in two)? If the Forward rate is 4%, what arbitrage strategy has positive prots? Make sure you are state exactly what happens in each period