USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 148

Multiple Choice

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 percent in exchange for receiving three-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 percent. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent 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) Newport is obligated to pay the dealer $105,000.

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Definitions:

Credit Memo

A Credit Memo is a document issued by a seller to a buyer, reducing the amount the buyer owes to the seller under specific circumstances, such as returned goods.

Gross Profit

Gross profit is a company's revenue minus its cost of goods sold, representing the profit made before deducting overheads, payroll, taxation, and interest payments.

Discount Period

The discount period is the timeframe during which a payment can be made at a reduced price or interest rate before returning to its original rate.

Perpetual Inventory System

An approach to inventory management where updates are made continuously as inventory items are bought and sold.