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%.
a. Represent the exposure on cash flow diagrams.
b. To cover his exposure created by the mismatch of maturities, the dealer signs a forward loan. Calculate this treasurer's break-even forward rate on interest, assuming no other costs.
c. Assume that instead, the treasurer decides to wait 3 months and take a spot loan then. To cover his exposure, the treasurer signs a 3 times 6 FRA. (i) Use cash flow diagrams to show how times achieves his goal, (ii) What is the settlement amount is the forward rate is 6.87%, the Libor rate on settlement date is 6.09%, and the amount the bank needed to cover the mismatch is 38 million?