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Maintain the current spread and cash settlement

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a. A bank made a 6-month $100 million loan at 6% funded by a 3-month deposit at 3%.To protect against interest rates when rolling over the deposit in three months, the bank decides to hedge using a forward rate agreement. Show the steps to hedge and maintain the current spread and the cash settlement if interest rates change +/- 2%. Use 91 days for 3-month FRAs.

b. Show the net 3-month spread in dollars earned by the bank after it rolls over the deposit for all three interest rate scenarios after hedging with FRAs.

Reference no: EM133000559

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