Question 3

April 1st 2016 As a treasurer of ABC Company Ltd, a Singaporean company operating in Singapore but with USD as a functional currency, you just signed a 5-year loan with UBS Bank where you borrow 10 million USD at a rate of 1-year Libor + 200 bps (basis points). The 1- year Libor rate on April 1st 2016 is 0.75%.

However, since the beginning of the year, there has been persistent market expectations that the US Federal Reserve might intensify its raising of short term interest rates from their historically and abnormal low level.

(a) Calculate where possible the amount of interest that you will pay to UBS Bank.

(b) Analyse the risks (or lack thereof) that the loan exposes ABC Company Ltd to.

(c) Formulate a strategy using swaps to hedge this risk.