Exam 23: Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Exhibit 23.10 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3%. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6. -Refer to Exhibit 23.10. Suppose that 3-month LIBOR is 4.0% on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.

Warrants differ from options in a number of ways. Which of the following statements about warrants and options is false?

The writer of a ____ agreement makes settlement payments when LIBOR is less than the striking rate of the agreement.

The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price) *Number of shares specified by the warrant.

Forward rate agreements usually require substantial collateral.

Which of the following is not true about interest rate swaps?

Exhibit 23.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year. -Refer to Exhibit 23.8. Find the payoff if LIBOR closes at 4.7%.