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In late April, a corporate treasurer for a large blue-chip company projects the need for...

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Finance

In late April, a corporate treasurer for a large blue-chip company projects the need for a $2 million bank loan starting on 1 June, for a period of 90 days. The bank quotes a fixed rate of 6.4% on a 1 x 4 FRA. The corporate treasurer buys the 1 x 4 FRA on a face value of $2 million. On 1 June the bank bill swap rate (BBSW) is 6.1%, so she issues bank bills into the market at that rate and then organises settlement with the bank on the FRA.

a) Calculate the proceeds from the bank bills

b) Calculate the settlement amount

c) Explain the settlement process, i.e., explain which party makes the settlement payment

2.

You are a securities portfolio manager for a large bank. The economy has been contracting and growth has slowed markedly, but analysts believe that it will soon turn the corner and begin to expand. As a result, rates are forecast to begin rising over the next 12 months.

a) Would you prefer to shorten or lengthen the average maturity of your securities? Why?

b) Would wider ADI management agree with your decision? Explain

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