USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 2

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. Assuming that three-month LIBOR is 5.00 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 McIntire.

• A) The dealer is obligated to pay McIntire $62,500.
• B) The dealer is obligated to pay McIntire $57,500.
• C) McIntire is obligated to pay the dealer $62,500.
• D) McIntire is obligated to pay the dealer $57,500.
• E) McIntire is obligated to pay the dealer $55,700.

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Definitions:

Transformational Equivalence

The understanding that an object remains the same even if it undergoes a transformation that changes its appearance.

Neurological Studies

Research and examinations focused on understanding the structure, function, and disorders of the nervous system.

Mental Images

Visual representations in the mind that resemble the physical objects or scenes we are thinking about.

Sensory Perception

The process of receiving and interpreting sensory information through our sense organs.