A bank made a 6-month $50 million loan at 5% funded by a one-year wholesale deposit at 4%. To protect against interest rate changes when rolling over the loan in 6 months, the bank decides to hedge using a forward rate agreement (FRA). 1. Explain how you would hedge using FRAs to maintain the current spread. 2. Show the net spread in dollars if interest rates are 3%, 5% and 7% at maturity. Use 184 days for 6-month FRA

A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss.  The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%.  There are actually 92 days in the three-month FRA period. Which one of following statements is correct?     Group of answer choices   If the settlement rate is 4.8% three months from today, then the buyer pays the seller.     To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.     Without the FRA, the bank will lose if the market interest rate drops at the end of three months.     If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84   To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures…

A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss.  The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%.  There are actually 92 days in the three-month FRA period. Which one of following statements is correct?     Group of answer choices To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.   To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.     If the settlement rate is 4.8% three months from today, then the buyer pays the seller.     If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84     Without the FRA, the bank will lose if the market interest rate drops at the end of three months.

(Related to Checkpoint 18.2) (Estimating the cost of bank credit) Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 14 percent per annum with interest paid in advance (discounted). In addition, Paymaster must maintain a minimum demand deposit with the bank of 10 percent of the loan balance throughout the term of the loan. If Paymaster plans to borrow $90,000 for a period of 6 months, what is the annualized cost of the bank loan? The annualized cost of the bank loan is %. (Round to two decimal places.)