Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Question 2 Assume that it is now mid-December. In three months time the finance director of Ramada Plc. plans to invest $20 million in a
Question 2 Assume that it is now mid-December. In three months time the finance director of Ramada Plc. plans to invest $20 million in a new manufacturing centre . It is anticipated the company will require a short term bank loan for a period of six months .Thereafter , it will able to raise $20 million by selling its shares on the open market .The finance director is concerned the Central Bank will increase interest rates in the near future . LIBOR is currently 6% per annum and Ramada Plc.can borrow at LIBOR + 0.9%. Derivative contracts may be assumed to mature at the end of the relevant month . Three types of hedge are available (1) Three month futures ($500,000 contract size , $12.50 tick size) December 93.870 March 93.790 June 93.680 (2) Options on three -month sterling futures ($500,000 contract size , premium cost in annual %) C alls Puts December March June December March June 9375 0 0.123 0.190 0.275 0.025 0.085 0.185 94000 0.018 0.077 0.150 0.160 0.255 0.330 94250 0 0.080 0.080 0.405 0.480 0.550 (3) Forward Rate Agreement (FRA) prices: 3 v 6 6.11 - 6.01 3 v 5 6.18 - 6.10 3 v 9 6.38 - 6.30 Required : - a. Create a report for the finance director, which: - Critically evaluates futures , options and fonlvard rate agreements - Illustrates how the short-term interest rate risk might be hedged, and the possible results of the alternative hedges, if interest rates increase by 0.5% All relevant calculations must be shown
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started