USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 145

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 TexMex.

• A) The dealer is obligated to pay TexMex $61,881.
• B) The dealer is obligated to pay TexMex $61,500.
• C) TexMex is obligated to pay the dealer $247,524.
• D) TexMex is obligated to pay the dealer $246,000.
• E) TexMex is obligated to pay the dealer $258,000.

---

Definitions:

MC, AVC, ATC Curves

Graphical representations in economics of the marginal cost, average variable cost, and average total cost, respectively, which firms use for production and pricing decisions.

Economies of Scale

Cost advantages that businesses obtain due to the scale of operation, with cost per unit of output generally decreasing with increasing scale.

Long-Run Average Total Cost Curve

A curve that shows the lowest average cost at which a firm can produce any given level of output in the long run, when all inputs are variable.

Declining Segment

A portion of a market that is experiencing a decrease in consumer demand or sales.