Question: 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%. The total amount is USD38 million. To cover his exposure created by the mismatch of maturities, the dealer needs to borrow another USD38 million for months, in 3 months' time, and hedge the position now with an FRA. The market has the following quotes from three dealers:
BANK A 3 x 6 6.92-83
BANK B 3 x 6 6.87-78
BANK C 3 x 6 6.89-80
a. What is (are) the exposure(s) of this treasurer? Represent the result on cash flow diagrams.
b. Calculate this treasurer's break-even forward rate of interest, assuming no other costs.
c. What is the best FRA rate offered to this treasurer?
d. Calculate the settlement amount that would be received (paid) by the treasurer if, on the settlement date, the LIBOR fixing was 6.09%.