You are a corporate account officer with the Commercial & Industrial Bank Corporation (CIBC). One of your major manufacturing clients, who are retooling one of their factories, just bought a piece of customized machinery to be delivered 3 in six months time. The companys treasurer intends to initially finance the purchase in the short-term loan market for six months and inquires about the possibilities of locking in the borrowing cost now. The amount is USD 10m and the loan would be disbursed in a six months from now to be repaid in exactly one years time from now. The current short-term USD Libor term structure is as follows:

Maturity (D) Libor Rate (%)

30 0.15%

90 0.24%

180 0.33%

360 0.55%

(a) What kind of solution to their problem would you suggest to your manufacturing client?

(b) Quote a borrowing cost for the preceding suggestion. Since your boss is of a somewhat suspicious nature you better indicate your methodology to derive the quote.

(c) What alternative could you suggest to your customer?

(d) Define and calculate the LIBOR forward curve. Why or why not is it a good predictor for future LIBOR rates?

(e) At expiration, i.e., six months after entering into the agreement, the 180D 20 Libor stands at 0.90%. Who wins and who loses? Calculate the clients gain or loss from your suggestion or the alternative, whichever you prefer.