QUESTION FOUR a) Figure 1: Balance Sheet Required: Outline the transactions necessary for the financial institution to use an offbalance sheet hedge for the asset-liability position described and estimate the overall expected portfolio return on the bank's assets. (10 Marks) b) The treasurer of Any Bank Ltd has projected a cash short fall of USD 10 million in the 90 days time. She intends to take out a loan that shall be paid via a bullet payment after 720 days so as to cover the short fall. However, she is worried that interest rates might rise and thus is thinking of hedging this risk through a suitable forward rate agreement (FRA). Required: i) Identify (name) the FRA that shall meet the treasurer's needs. (1 mark) ii) Assuming she is able to find a counterparty that is able to get into an FRA with a strike rate of 9.5% p.a. and that in 90 days, the 720 day LIBOR is at 8.25% p.a.: - what is the payoff and identify who makes the payment (3 marks) - Now assume that instead of a forward, the treasurer had opted to use an interest rate option instead of an FRA (all else remaining the same), calculate the pay off. (2 marks) c) Discuss the main goals of money market investors (4 marks) d) What are the main arguments for treasury centralization and out sourcing of services? (5 marks) [Total Marks = 25] QUESTION FOUR a) Figure 1: Balance Sheet Required: Outline the transactions necessary for the financial institution to use an offbalance sheet hedge for the asset-liability position described and estimate the overall expected portfolio return on the bank's assets. (10 Marks) b) The treasurer of Any Bank Ltd has projected a cash short fall of USD 10 million in the 90 days time. She intends to take out a loan that shall be paid via a bullet payment after 720 days so as to cover the short fall. However, she is worried that interest rates might rise and thus is thinking of hedging this risk through a suitable forward rate agreement (FRA). Required: i) Identify (name) the FRA that shall meet the treasurer's needs. (1 mark) ii) Assuming she is able to find a counterparty that is able to get into an FRA with a strike rate of 9.5% p.a. and that in 90 days, the 720 day LIBOR is at 8.25% p.a.: - what is the payoff and identify who makes the payment (3 marks) - Now assume that instead of a forward, the treasurer had opted to use an interest rate option instead of an FRA (all else remaining the same), calculate the pay off. (2 marks) c) Discuss the main goals of money market investors (4 marks) d) What are the main arguments for treasury centralization and out sourcing of services? (5 marks) [Total Marks = 25]