Exhibit 23.10 Use the Information Below for the Following Problem(S)

question 55

Multiple Choice

Exhibit 23.10
Use the Information Below for the Following Problem(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 × 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 23.10.Suppose that 3-month LIBOR is 4.0% on the rate determination day,and the contract specified settlement in arrears at month 6,describe the transaction that occurs between the dealer and Newport.

• A) The dealer is obligated to pay Newport $125,000.
• B) The dealer is obligated to pay Newport $115,000.
• C) Newport is obligated to pay the dealer $125,000.
• D) Newport is obligated to pay the dealer $115,000.
• E) None of the above

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Definitions:

Capital-Budgeting

The process by which investors or managers evaluate and select long-term investments based on their potential to generate net revenues.

Risk-Free Rate

The theoretical return on an investment with no risk of financial loss, typically represented by the yield on government bonds.

Risk-Free Rate

The theoretical return on an investment with zero risk, typically represented by the yield on government securities.

Expected Rate

The rate of return that an investor anticipates earning on an investment without taking into account inflation or other factors that could affect the actual yield.