USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 36

Multiple Choice

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 percent in exchange for receiving three-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 percent. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 15.16. How much compensation does the dealer receive for transaction costs, credit risk, and other costs associated with matching the FRAs?

• A) $30,000
• B) $31,250
• C) $7,500
• D) $5,000
• E) $0

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Definitions:

Forensic Psychology

The branch of psychology concerned with intersections between psychological practice and research and the judicial system. Also related to the field of forensic psychiatry.

Confidentiality

The principle that certain professionals will not divulge the information they obtain from a client.

Forensic Psychology

The application of psychological principles and techniques to legal issues, including the assessment of individuals involved in the legal system.

Legal and Judicial Systems

The framework and institutions that establish and apply laws in a society, including courts, legislatures, and law enforcement.