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Exhibit 14-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 73

Multiple Choice

Exhibit 14-6
USE THE FOLLOWING INFORMATION FOR THE NEXT 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% in exchange for receiving 3-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%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Megabuks.

Definitions:

Seniority-Based

A system or practice where decisions on promotions, layoffs, and benefits are made based on the length of an employee's service within an organization.

Union-Mandated

Requirements or actions imposed by labor unions, often through collective bargaining or union regulations, that employers must follow.

Management Rights

The prerogatives and authorities held by employers to direct and control business operations, including hiring, work assignments, and discipline.

Lean Production

A manufacturing methodology aiming at minimizing waste and maximizing efficiency by using less of everything compared to mass production.