FIN 4604 Final Questions And Correct
Answers
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending
margin of 1.26 percent per annum on a six-month rollover basis from a London bank. If six-
month LIBOR is 4.55 percent over the first six-month interval and 5.380 percent over the second
six-month interval, how much will Grecian Tile pay in interest over the first year of its
Eurodollar loan? (Do not round intermediate calculations. Round your answer to 2 decimal
places.) Interest: $93,375.00
$1,500,000 × (.0455 + .0126)/2 + $1,500,000 × (.05380 + .0126)/2 = $43,575 + $49,800.00 =
$93,375.00.
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.51 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 4.880 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. (Do not round
intermediate calculations. Round your answer to 2 decimal places.) Buyer pays seller the
absolute value of the FRA $4,770.51
, FIN 4604 Final Questions And Correct
Answers
Since the settlement rate is less than the agreement rate, the buyer pays the seller the absolute
value of the FRA. The absolute value of the FRA is:
= $3,000,000 × [(.04880 − .0551) × 92/360]/[1 + (.04880 × 92/360)]
= $3,000,000 × [−.001610/(1.012471)]
= $4,770.51.
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.54 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 6.145 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. (Do not round
intermediate calculations. Round your answer to 2 decimal places.) Seller pays the buyer
the absolute value of the FRA$4,566.62
Since the settlement rate is greater than the agreement rate, the seller pays the buyer the absolute
value of the FRA. The absolute value of the FRA is:
, FIN 4604 Final Questions And Correct
Answers
= $3,000,000 × [(.06145 − .0554) × 92/360]/[1 + (.06145 × 92/360)]
= $3,000,000 × [−.001546/(1.015704)]
= $4,566.29.
A "three against nine" FRA has an agreement rate of 4.95 percent. You believe six-month LIBOR
in three months will be 5.225 percent. You decide to take a speculative position in a FRA with a
$1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should
buy or sell the FRA and what your expected profit will be if your forecast is correct about the
sixmonth LIBOR rate. (Do not round intermediate calculations. Round your answer to 2 decimal
places.) Buy FRA for an expected profit of$1,361.75
Since the agreement rate is less than your forecast, you should buy a FRA. If your forecast is
correct your expected profit will be:
= $1,000,000 × [(.05225 − .0495) × 183/360]/[1 + (.05225 × 183/360)]
= $1,000,000 × [.001398/(1.026560)]
= $1,361.83.
, FIN 4604 Final Questions And Correct
Answers
Edge Act banks are not prohibited from owning equity in business corporations, unlike domestic
commercial banks. T/F TRUE
International banks are different from domestic banks in what way(s)?
Multiple Choice
-International banks can arrange trade financing.
-International banks can arrange for foreign exchange transactions.
-International banks can assist their clients in hedging exchange rate risk.
-all of the options all of the options
Since international banks have the facilities to trade foreign exchange,
-they generally also make a market as a dealer in foreign exchange.
-they generally also make a market as a dealer in foreign exchange derivatives.
-they generally also trade foreign exchange products for their own account.
-none of the options they generally also trade foreign exchange products for their own
account.
Answers
Grecian Tile Manufacturing of Athens, Georgia, borrows $1,500,000 at LIBOR plus a lending
margin of 1.26 percent per annum on a six-month rollover basis from a London bank. If six-
month LIBOR is 4.55 percent over the first six-month interval and 5.380 percent over the second
six-month interval, how much will Grecian Tile pay in interest over the first year of its
Eurodollar loan? (Do not round intermediate calculations. Round your answer to 2 decimal
places.) Interest: $93,375.00
$1,500,000 × (.0455 + .0126)/2 + $1,500,000 × (.05380 + .0126)/2 = $43,575 + $49,800.00 =
$93,375.00.
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.51 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 4.880 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. (Do not round
intermediate calculations. Round your answer to 2 decimal places.) Buyer pays seller the
absolute value of the FRA $4,770.51
, FIN 4604 Final Questions And Correct
Answers
Since the settlement rate is less than the agreement rate, the buyer pays the seller the absolute
value of the FRA. The absolute value of the FRA is:
= $3,000,000 × [(.04880 − .0551) × 92/360]/[1 + (.04880 × 92/360)]
= $3,000,000 × [−.001610/(1.012471)]
= $4,770.51.
A bank sells a "three against six" $3,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The purpose of the FRA is to cover the
interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar
loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is
5.54 percent. There are actually 92 days in the three-month FRA period. Assume that three
months from today the settlement rate is 6.145 percent. Determine how much the FRA is worth
and who pays who—the buyer pays the seller or the seller pays the buyer. (Do not round
intermediate calculations. Round your answer to 2 decimal places.) Seller pays the buyer
the absolute value of the FRA$4,566.62
Since the settlement rate is greater than the agreement rate, the seller pays the buyer the absolute
value of the FRA. The absolute value of the FRA is:
, FIN 4604 Final Questions And Correct
Answers
= $3,000,000 × [(.06145 − .0554) × 92/360]/[1 + (.06145 × 92/360)]
= $3,000,000 × [−.001546/(1.015704)]
= $4,566.29.
A "three against nine" FRA has an agreement rate of 4.95 percent. You believe six-month LIBOR
in three months will be 5.225 percent. You decide to take a speculative position in a FRA with a
$1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should
buy or sell the FRA and what your expected profit will be if your forecast is correct about the
sixmonth LIBOR rate. (Do not round intermediate calculations. Round your answer to 2 decimal
places.) Buy FRA for an expected profit of$1,361.75
Since the agreement rate is less than your forecast, you should buy a FRA. If your forecast is
correct your expected profit will be:
= $1,000,000 × [(.05225 − .0495) × 183/360]/[1 + (.05225 × 183/360)]
= $1,000,000 × [.001398/(1.026560)]
= $1,361.83.
, FIN 4604 Final Questions And Correct
Answers
Edge Act banks are not prohibited from owning equity in business corporations, unlike domestic
commercial banks. T/F TRUE
International banks are different from domestic banks in what way(s)?
Multiple Choice
-International banks can arrange trade financing.
-International banks can arrange for foreign exchange transactions.
-International banks can assist their clients in hedging exchange rate risk.
-all of the options all of the options
Since international banks have the facilities to trade foreign exchange,
-they generally also make a market as a dealer in foreign exchange.
-they generally also make a market as a dealer in foreign exchange derivatives.
-they generally also trade foreign exchange products for their own account.
-none of the options they generally also trade foreign exchange products for their own
account.
