1. You are a corporation and need to borrower $50,000,000. You hire a consultant, Gus from Iona, who says that because you are a higher risk company, you would have to pay a floating rate of LIBOR plus 450 basis points. Since you are risk averse and want to know your costs, you ask Gus what can be done to get a fixed rate. Gus shrugs his shoulders and says Nothing you have no other choice. You then remember something from your Marist days about swaps. You call Tori, old classmate who works in investment banking, and she advises you to get into a fixed/float swap. You fire the Gus and hire Tori. She advises you that the floating rate you were given is market. She can swap the LIBOR for 5.00% fixed. LIBOR is currently 3.00%

Calculate your annual net payment and effective interest rate.

2. Using the information above, you think interest rates are going to go down, but do not want to take a chance on rising rates. LIBOR is currently 3%, so you are paying 7.50% (3.00% LIBOR plus the spread of 4.50%). Tori suggests that you purchase a cap on LIBOR at 4.50% for $225,000 per year.

If LIBOR goes to 5%, what is the net payment? Show the cash flows

What is the maximum effective interest rate with the cap?

Which would you do Swap or Cap???

Options

Boeing options are selling as follows:

May 17 calls with a $385 strike price is $14.65

May 17 puts with a $385 strike price is $19.00

If Boeing stock is currently selling at 381.42:

What is the intrinsic value and the time value of the calls? Of the puts?

Are the calls in the money or out of the money? The puts?