What is the loss to the hedge fund

Reference no: EM133491114

Part 1.

As a pension fund manager, you anticipate that you have to pay out 8 percent on $100 million for the next five years. The payment is made semi-annually. You currently hold $100 million of floating-rate note that pays LIBOR + 0.5 percent. What is your potential risk?

To reduce your risk, you arrange a swap with a dealer who agree to pay you 7.55 percent fixed rate, while you pay him LIBOR. The swap payment is made semi-annually as well. Determine if you have sufficient cash flow to pension fund holder. Justify your answer.

Part 2.

A hedge fund is currently engaged in a plain vanilla interest rate swap with a company named BlueTrade. Under the terms of the swap, the hedge fund receives six-month LIBOR and pay 5 percent per annum on a principle of $100 million for five years. Payments are made every 6 months at rear. Assume that the interest rates start to soar after two years and BlueTrade defaults on the seventh payment date when the LIBOR rate is 8 percent for all maturities (with semi-annual compounding). The 6-months LIBOR rate 6-months ago is 7.5 percent. What is the loss to the hedge fund?

Reference no: EM133491114

Questions Cloud

What is your research question for forensic science : What is your research question for forensic science? This should be in question format, identifying a relationship between variables.

What type of trade finance instrument should exporter use : The exchange rate is currently $1.25/£. The exporter wants to be paid in U.S. dollars within 30 days. What type of trade finance instrument should the exporter

Discuss the mental illness : Briefly discuss the mental illness and/or disability presented in the article Factor et al., 2022.

How case influence law enforcement investigation practices : Review the article titled Apple's fight with Trump and the Justice Department. Discuss how the case will influence law enforcement investigation practices.

What is the loss to the hedge fund : The swap payment is made semi-annually as well. Determine if you have sufficient cash flow to pension fund holder. Justify your answer

Calculate the monthly payment jona kenson needs to deposit : Calculate the monthly payment Jona Kenson needs to deposit to satisfy these retirement requests.

Why do you think some men choose to buy sex : Why do you think some men choose to buy sex? What do you think about the portrayal of 'brothel life' in Louis Theroux's documentary?

Why it is beneficial for learners to increase their mand : Review the examples in the grid below and identify which verbal operant (mands, tacts, echoic, and intraverbal) is being presented.

Discuss the subcultures to which you belong : Discuss the subcultures to which you belong. What norms and values of each subculture might conflict with the norms and values of the larger culture?

User Account

All Pages