USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 107

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 advance, 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 $56,000.

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Definitions:

Ovum

One egg. The female “egg” that unites with the male sperm to begin reproduction.

Uterus

A muscular organ in the female reproductive system where a fertilized egg can develop into a fetus.

Vascular

Relating to the body's blood vessels (arteries, veins, and capillaries) involved in the circulation of blood.

Tubular Glands

Glands consisting of tubes that produce and secrete substances such as sweat, saliva, or mucus.