P4例题及答案

MacawberAssume that it is now mid December.The finance director of Macawber Inc (incorporated), has recently reviewed the company’s monthly cash budgets for the next year. As a result of buying new machinery in three months time, his company is expected to require short-term financing of $20 million for a period of six months until the proceeds from a factory disposal became available. The finance director is concerned that, as a result of increasing wage settlements, the Central Bank will increase interest rates in the near future.LIBOR is currently 6% per annum and Macawber can borrow at LIBOR+0.9%.Derivative contracts may be assumed to mature at the end of the relevant month.Three types of hedge are available:(1)FRA prices3 – 6 6.11 – 6.013 – 9 6.38 – 6.30(2)Three month futures ($500,000 contract size, $12.50 tick size)December 93.870March 93.790June 93.680(3)Options on three month sterling futures ($500,000 contract size, premium cost in annual %)Calls PutsDecember March June December March June 93750 0.120 0.195 0.270 0.020 0.085 0.180 94000 0.015 0.075 0.155 0.165 0.255 0.335 94250 0 0.085 0.085 0.400 0.480 0.555 Required(a)Prepare a report for the finance director, which:(i)Briefly discusses the relative advantages and disadvantages of the three types of hedge(ii)Illustrates how the short-term interest rate risk might be hedged, and the possible results of the alternative hedges, if interest rates increase by 0.5%All relevant calculations must be shown.(15 marks) (b)The following five-year loan interest rates are available to Stentor Ltd, an AA credit ratedcompany in the Macawber group, and to Evnor Ltd, a BB+ rated company. Stentor wants to borrow at a floating rate of interest, and Evnor wants to borrow at a fixed rate of interest.Fixed rate Floating rateStentor 8.75% LIBOR+0.50%Evnor 9.50% LIBOR+0.90%A bank is willing to act as an intermediary to facilitate a five year swap, for an annual fee of0.05% of the swap value. Both of these fees are payable by EACH of the companies.Taxation may be ignored.RequiredEvaluate, using an illustrative swap, whether or not an interest rate swap may be arranged that is beneficial to both companies. (5 marks)(Total= 20 marks)SOLUTION(a)REPORTTo: Finance DirectorFrom: Financial AccountantDate:Subject: Hedging methodsCurrent positionIf we are still able to borrow at the current rate in three months’ time, the interest charge will be: $20 million*6.9%*(6/12) = $690,000If however interest rates increase by 0.5%, the interest charge will be:$20 million*7.4%*(6/12) = $740,000The hedging methods we can use are as follows.Forward rate agreementA FRA effectively fixes the rate of interest for borrowing at a certain time in the future. If the actual interest rate is above the rate agreed, the bank will pay the company the difference. If the actual rate is lower than the rate agreed, the company pays the bank the difference.Advantages of FRAs Disadvantages of FRAs(i) A FRA fixes the sum that Macawber hasto pay, and eliminates the possibility oflarge losses if interest rate increases aregreater than are currently expected.(ii)The forward rate should be an unbiased predictor of the future interest rate,based on the information.(iii)Macawber should have no difficulty obtaining a forward rate agreement, sincethe size of the loan and the time periodare both of appropriate magnitudes forsuch an agreement.(iv)FRAs have no margin requirements. (i)The spot rate may not move in thedirection or to the extent predicted by theFRA, and Macawber will be unable to takeadvantage of favorable spot ratemovements.(ii)There may be problems renewing the agreement if it turns out that Macawberneeds the finance for much longer thananticipated.Using a forward rate agreementUsing a 3-9 agreement with a rate of 6.38If the LIBOR rate increases to 6.50%, and the borrowing rate therefore rises to 7.40%, the cost is:$ Payment on loan as above (0.074*$20m*(6/12)) 740,000 Less: Receipt from FRA (6.50 – 6.38)%*$20m*(6/12) (12,000)728,000Interest rate futures are similar to FRAs, except that the terms, amounts and periods are standardized.Advantages of futures Disadvantages of futures(i)The futures price is likely to vary withchanges in interest rates, and this acts as ahedge against adverse interest ratemovements(ii)Transaction costs should be lower than for the other hedging methods.(iii)The exact date of the interest receipt or payment does not have to be known, as thecontract can be closed out on the date thatthe payment is made. (i)Contract cannot be tailored toMacawber’s exact requirements.(ii)Hedge inefficiencies arise because Macawber has to deal in a whole numberof contracts and by basis risk.(iii)Futures are only available on certain financial instruments.(iv)Macawber will be required to deposit a margin (cash or securities).Using futuresSet-up today – mid December1.Number of contracts requiredexposure periodprincipal$20m6C ontracts=*=*= 80contract size contract period$0.5m32.Date – start of the loanmid March3.Contracts to sellEnter into 80 March contracts to pay interest at 6.21% (100-93.79)Outcome – mid March4.Actual transaction @LIBOR + 0.9% 7.40%5.Profit/loss on the futuresOpening position – (sell) pay 6.21%Closing position – (buy) receive 6.53%(profit)0.32% step 4&57.08%Note: In £s this is 0.0708*$20m*6/12= $708,000. A better outcome than the FRA Workings Now – mid December Mid March March futures 6.21 6.53LIBOR 6.00 6.50Basis 0.21 ×1/7= 0.037 half-months of timing 1 half-month remainingAn interest rate option gives the buyer the right but not the obligation to deal at an agreed interest rate at a future maturity date. A buyer with the option to borrow will not wish to exercise it if the market interest rate is below the rate specified in the option agreement.Advantages of options Disadvantages of options(i)Options reduce exposure to adverseinterest rate movements whilst allowingthe borrower to profit from favorableinterest rate movements.(ii)OTC interest rate options tailored to the company’s needs can be obtained. (i)Premium cost(ii)The option contracts are standard contracts, suffering from the limitationsof standard futures contracts.Using optionsSet-up today – mid December1.Number of contracts required= 802.Date – start of the loanmid March3.Buy 80 March put options at 93750 94000 942504.Premium 0.085% 0.255% 0.480% Outcome – mid March5.Actual transaction @LIBOR + 0.9% 7.40%7.40%7.40%6.Profit/loss on the futuresOpening position – (sell) pay 6.25% 6.00% 5.75%Closing position – (buy) receive 6.53%* 6.50% 6.47%(profit)0.28%(profit)0.50% (profit)0.72% step 4&5&6 7.205%7.155% 7.160%$720,500 $715,500 $716,000*Workings Now – mid December Mid MarchMarch options 6.25 6.53LIBOR 6.00 6.50Basis 0.25 ×1/7= 0.037 half-months of timing 1 half-month remainingConclusionThe futures contract gives the lowest cost and should be recommended if interest rates are expected to rise.(b)Total payment without swap =LIBOR + 0.5% (Stentor) + 9.5% (Evnor) = LIBOR + 10%Total payment with swap =LIBOR + 0.9% (Evnor) + 8.75% (Stentor) + 0.1% fees = LIBOR+9.75% There is a potential gain of 0.25% on the swap value. Assume this is split equally between the parties, although Stentor may be able to negotiate a higher share of the gain because of its better credit rating.Keeping the floating rate at LIBOR:Stentor EvnorPays interest (8.75%) (LIBOR +0.9%)Bank fees (0.05%) (0.05%)Pays in swap (LIBOR) (8.425%)Receives in swap 8.425%* LIBORNet cost (LIBOR +0.375%) (9.375%)Gain of 0.125% Gain of 0.125%* 8.75%+ 0.05% + LIBOR - X= LIBOR+ 0.50% - 0.125% X=8.425%。