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:

Displacement

In psychology, it is a defense mechanism where the mind substitutes either a new aim or a new object for goals felt in their original form to be dangerous or unacceptable.

Symptoms Of Cancer

Signs or indications of cancer, which can vary widely depending on the type, such as unexplained weight loss, fatigue, or lumps.

Defense Mechanism

Psychological strategies unconsciously used by individuals to protect themselves from anxiety and to cope with reality.

Denial

A defense mechanism in which confrontation with a personal problem or with reality is avoided by denying the existence of the problem or reality.