Some years ago a Volkswagen borrowed funds at the LIBOR3M +1%. Interest payments

Question

Some years ago a Volkswagen borrowed funds at the LIBOR3M +1%. Interest payments are made on a three months basis the 1/1, 1 /4, 1/7 and 1/10 of each year. Principal payments are made every six months the 1/1 and the 1/7 of each year for an amount equal to 5,000,000 Euro. Now we are at the first of February 2015: the principal is equal to 20,000,000 Euro and you know that the LIBOR3M for the first payment (1/4) is equal to 3.5%. Determine the hedging strategy: Specify which FRA/FRAs you should negotiate, at which rate and for which amount.

ASK Quotes

FRA 1,4 3.63%

FRA 2,5 3.75%

FRA 3,6 3.86%

FRA 4,7 3.94%

FRA 5,8 4.05%

FRA 6,9 4.21%

FRA 7,10 4.31%

FRA 8,11 4.43%

FRA 9,12 4.40%

Explanation / Answer

Hedging Strategy = Buy Interest Rate FRA

..

The FRAs that should be negotiated

1)FRA 2,5 3.75% - for an amount equal to $20,000,000

2)FRA 5,8 4.05% - for an amount equal to $15,000,000

3)FRA 8,11 4.43% - for an amount equal to $15,000,000

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