Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 9.M, Problem M.7.3P
To determine
Hedging:
Hedging against an investment risk is termed for strategically implementing the instruments and tools in the market to minimize the risk and effects of any adverse price movements. It can be said that investors are benefitted through hedging as they hedge one investment by making other investment.
London Interbank Offered rate (LIBOR):
The London Interbank Offered rate (LIBOR) is refers to the average interest rate enabling leading banks to borrow funds from other banks in the London Market.
To calculate:
LIBOR Rate as on December 31, 2013.
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Part IV: Problem solving:
Answer the following questions showing all the steps conducted to find the final answer.
Lolly bank issues a $5 million loan to a firm with A- credit rating. The modified duration on the loan is 8 years. At the time of issue, the credit spread between A- bond and U.S. Treasury bonds is 3%. The bank believes that the borrowers’ credit rating may fall during the period of the loan. To hedge this credit risk, the banks enters (sells) a $5 million credit spread forward contract. At the end of the of the forward period, the borrowers credit rating does indeed drop to BB. The credit spread between BB rated bonds and U.S. Treasury bonds is 7%.
Calculate the amount that the bank should receive from the forward buyer.
(Following Rates are Quoted)
Company A
Company B
Credit Rating
A
B
Fixed Rate
6%
8%
Floating Rate
LIBOR+1%
LIBOR+1.5%
Which company has a relative advantage and in which market?
Which company has an absolute advantage and in which market
Company A wants to borrow floating. Company B wants to borrow fix. Build a proper SWAP that benefit the two companies.
For a bank that funds its fixed-rate loans with floating rate deposits whose cost
varies with a the 3-month LIBOR, it can magnify its strategic interest rate exposure
by entering into a plain vanilla interest rate swap where it receives the fixed-rate and
pay the floating rate.
True
False
Chapter 9 Solutions
Advanced Accounting
Ch. 9.M - Prob. 1UTICh. 9.M - Prob. 2UTICh. 9.M - Prob. 3UTICh. 9.M - Prob. 4UTICh. 9.M - Prob. 5UTICh. 9.M - Prob. 1ECh. 9.M - Prob. 2ECh. 9.M - Prob. 3ECh. 9.M - Prob. 4.1ECh. 9.M - Prob. 4.2E
Ch. 9.M - Prob. 4.3ECh. 9.M - Prob. 4.4ECh. 9.M - Prob. 4.5ECh. 9.M - Prob. 4.6ECh. 9.M - Prob. 5ECh. 9.M - Prob. 6.1ECh. 9.M - Prob. 6.2ECh. 9.M - Prob. 7ECh. 9.M - Prob. M.1.1PCh. 9.M - Prob. M.1.2PCh. 9.M - Prob. M.2.1PCh. 9.M - Prob. M.2.2PCh. 9.M - Prob. M.3PCh. 9.M - Prob. M.4.3PCh. 9.M - Prob. M.4.4PCh. 9.M - Prob. M.4.5PCh. 9.M - Prob. M.4.6PCh. 9.M - Prob. M.5PCh. 9.M - Prob. M.6PCh. 9.M - Prob. M.7.1PCh. 9.M - Prob. M.7.2PCh. 9.M - Prob. M.7.3PCh. 9 - Prob. 1UTICh. 9 - Prob. 2UTICh. 9 - Prob. 3UTICh. 9 - Prob. 1.1ECh. 9 - Prob. 1.2ECh. 9 - Exercise 2 (LO 3) The accounting issues associated...Ch. 9 - Prob. 3.1ECh. 9 - Prob. 3.2ECh. 9 - Prob. 3.3ECh. 9 - Prob. 4.1ECh. 9 - Prob. 4.2E
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