Exhibit 23.3 Use the Information Below for the Following Problem(S)

question 47

Multiple Choice

Exhibit 23.3
Use the Information Below for the Following Problem(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be based will be undesirable. (The amount of Chimichango's first payment will be known at origination.) To reduce the company's interest rate exposure, you decide to purchase a 3 × 6 FRA whereby you pay the dealer's quoted fixed rate of 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 23.3.How much compensation does the dealer receive for transaction costs,credit risk and other costs associated with matching the FRA's?

• A) $30,000
• B) $31,250
• C) $7,500
• D) $5,000
• E) None of the above

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Definitions:

Leaving Money on the Table

A term used in finance and economics indicating a situation where less profit is made from a deal than what could have been made.

Investment Bank

A financial institution that assists individuals, corporations, and governments in raising financial capital by underwriting or acting as the client's agent in the issuance of securities.

Stock Offering

The process by which a company issues its stocks to investors to raise capital, often referred to as equity financing.

Entrepreneur

An individual who creates, organizes, and operates a business or businesses, taking on greater than normal financial risks in order to do so.