You Are Currently Borrowing €10 Million at Three-Month Euribor

question 6

Essay

You are currently borrowing €10 million at three-month Euribor + 75 basis points. The Euribor is
at 3%. You expect to borrow this amount for five years but are worried that Euribor will rise in the future. You can buy a 4% cap on three-month Euribor over the next five years with an annual cost of 0.75% (paid quarterly). Describe the evolution of your borrowing costs under various interest rate scenarios (i.e., above and below 4%).

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Definitions:

Participatives

A leadership style or approach that involves all members of a team in the decision-making process.

Immediate Rewards

Incentives or rewards given instantly after a desired behavior, used to reinforce that behavior.

Decision-making Process

A series of steps taken by individuals or groups to choose the best action among several options.

Tangible Awards

Physical representations or items given as recognition of achievement, service, or excellence.