It is early January 2022. CBG Resources limited intends to borrow £ 2 million in May for three months and is concerned about the risk of rising interest rates. It can borrow at LIBOR plus 1%. The current three-month LIBOR rate (spot rate) is 4.625%. June futures for short sterling have a current market price of 95.35. REQUIRED: Show how CBG Resources can set up for the exposure to the risk of increase in the three month LIBOR rate. Calculate the gain/loss from the interest rate future contract if in May the three month LIBOR is 5.5% and the June futures price is 94.25.

It is early January 2022. CBG Resources limited intends to borrow £ 2 million in May for three months and is concerned about the risk of rising interest rates. It can borrow at LIBOR plus 1%. The current three-month LIBOR rate (spot rate) is 4.625%. June futures for short sterling have a current market price of 95.35. REQUIRED: Show how CBG Resources can set up for the exposure to the risk of increase in the three month LIBOR rate. Calculate the gain/loss from the interest rate future contract if in May the three month LIBOR is 5.5% and the June futures price is 94.25.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter7: International Arbitrage And Interest Rate Parity

Section: Chapter Questions

Problem 3SBD

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