Represent the exposure on cash flow diagrams

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Reference no: EM131522080

The treasurer of a small bank has borrowed funds for 3 months at an interest rate of 6.73% and has lent funds for 6 months at 7.87%.

a. Represent the exposure on cash flow diagrams.

b. To cover his exposure created by the mismatch of maturities, the dealer signs a forward loan. Calculate this treasurer's break-even forward rate on interest, assuming no other costs.

c. Assume that instead, the treasurer decides to wait 3 months and take a spot loan then. To cover his exposure, the treasurer signs a 3 times 6 FRA. (i) Use cash flow diagrams to show how times achieves his goal, (ii) What is the settlement amount is the forward rate is 6.87%, the Libor rate on settlement date is 6.09%, and the amount the bank needed to cover the mismatch is 38 million?

Reference no: EM131522080

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