So your good action might set off a cascade of positive activities. You never know when you will need a helping hand, and when someone will pay it forward to you.
I will want the future and forward have positive or increasing correlation, so there will be no arbitrage opportunity. Long forward hedging are examined. The term structure of interest rates are given.
- How are swaps used as forward contracts? - What are implied forward rates? - How are prices quoted? - How are off-market swaps valued? - How do you hedge against any shift in the yield curve?
Is it a good idea for a country to pay off its foreign debt? Explain.
At present, LIBOR3 is 7.93% and LIBOR6 is 8.11%. What is the forward rate for a LIBOR3 deposit to be placed in three months?
Explain how Cisco Systems can use arbitrage to create a forward to fix the interest rate on a three month $10 million loan to be taken out in nine months. The loan will be priced off LIBOR. Please see the attached file.
We can conclude that it would probably be better to borrow at the lower US interest rates (about 8% for commercial short-term loans), pay off Brazilian advertising bills, receive Reals for product sold in Brazil, and then pay back cheaper US loan with
Explain how Cisco Systems can use arbitrage to create a forward forward to fix the interest rate on a three-month $10 million loan to be taken out in nine months. The loan will be priced off LIBOR.
The 400,000 pounds received in 180 days will pay off this loan. The 366,972 pounds borrowed convert to about $543,119 (computed as 366,972 × $1.48), which when invested at 8% interest will accumulate to be worth about $586,569.
With a forward, I would have to negotiate with the writer of the forward (my counterparty) and get him to agree to close out of the contract and would likely have to pay more in pair-off fees than I would suffered in losses just close out of a futures
Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. ANSWER: If the firm uses the forward hedge, it will pay out 300,000($.400) = $120,000 in 90 days.