USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 64

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 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 Darden'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 4.5 percent in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from McIntire Industries at its bid rate of 4 percent. (Assume a notional principal of $25,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 15.15. How much compensation does the dealer receive for transaction costs, credit risk, and other costs associated with matching the FRAs?

• A) $31,250
• B) $21,350
• C) $41,000
• D) $48,150
• E) $52,000

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Definitions:

Postoperative Pain

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Lung Cancer

A type of cancer that originates in the lungs, characterized by uncontrollable cell growth in lung tissue.

Visceral

Relating to the internal organs of the body, especially those within the chest or abdomen.

Phantom Pain

Pain perceived in an area of the body that has been amputated or is missing.