What should the company do? Assume that on 15 December, the DM future has
fallen to 89 and the Euro-DM rates are 8.1 percent.
Activity for Group D
Problem 13
A company plans to borrow $ 10 million by issuing a 90 days commercial paper
in August. The yield rate of the CP is 10 percent at the moment, i.e., the month of
March. Interest rates are anticipated to rise. Since no future contracts are
available in CP, the company can resort to T-bill futures. September T-bill
futures are being quoted at 90.
Assume that on August 15, the CP yield has risen to 11 percent and T-bill future
contract is quoting at 88. What is the company expected to do?
Problem 14
A treasury manager after five months will need to borrow Rs.1, 00,000 for 3
months. The current rates are as follows:
Duration Borrowing rates Lending rates
(Percent) (Percent)
3 - months 8 9
5 - months 9 10
8 - months 10 11
9 - months 11 12
Problem 15A company will need to buy after 4 months a forward rate agreement (FRA) from
a ban to borrow for 3 months. The 4/7 FRA is quoted at 6.5. What will the
company do if after 4 months, the rate?
(a) rises to 8 percent
(b) falls to 5 percent
(c) remains at 6.5 percent