Reference no: EM132668541
1) Company A agrees to enter into an FRA agreement with Company B in which Company A borrows $ 40,000,000 in 6-month time for a period of 9 months, and Company B invests $ 40,000,000 in 6-month time for a period of 9 months. The 6- month interest rate is 0.77% per annum and the 9-month interest rate is 0.89% per annum.
(i). What is the interest rate that both companies agreed upon?
(ii). Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.81% per annum and the 9-month interest rate is 0.96% per annum, calculate the compensatory payment and which party receives it?
(iii). Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.79% per annum and the 9-month interest rate is 0.86% per annum, calculate the compensatory payment and which party receives it?
2) A mining company in Australia has entered into a contract to export iron ore into China with delivery in three months' time. The contract is denominated in Chinese Yuan, CNY and is valued at CNY 500 million. The current spot exchange rate is AUD/CNY 5.18. Assume that the expected spot rate in three months' time is AUD/CNY 5.13. The three-month futures contract for Australian dollar and Chinese Yuan is trading at AUD/CNY 5.09. Should the mining company use the futures market to hedge the exchange rate exposure? Explain why or why not?
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