What is the risk exposure of wellington insurance

Assignment Help Financial Accounting

Reference no: EM133496592

Case: Takaroa Credit Union has $300 million of mortgage loans with a fixed rate of 7 per cent. The loans are financed by $300 million of CDs at a variable rate of bank-bill rate (BBR) plus 3 per cent. The Wellington Insurance owns $300 million of variable-rate notes yielding BBR plus 4 per cent. These loans are financed by $300 million of fixed-rate bonds costing 5 per cent.

a) What is the risk exposure of Takaroa CU?

b) What is the risk exposure of Wellington Insurance?

c) What would be the cash flow goals of each company if they were to enter into a swap arrangement?

Takaroa Credit Union and Wellington Insurance decide to enter into one-year swap arrangement with the swap rate of BBR+3.5% variable rate for 6% fixed, notional value of the swap of $300 million.

d) Diagram or explain the direction of the relevant cash flows for the swap arrangement.

Assume that at the end of the year BBR is equal to 2%.

e) Explain what sort of derivatives can be used in managing interest rate risk.

Reference no: EM133496592

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