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 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
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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 FRAs.
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