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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