Question :

(a) Show how a party can terminate a forward transaction prior to maturity?
(b) Suppose a forward Rate Agreement that:

• Expires in 30 days
• Is based on a notional principal amount of Rs 10,000,000
• Is based on a 90-day LIBOR.
• Specifies a forward rate of 5%.

Consider that the actual 90-day LIBOR 30 days from now (at expiration) is 8%. Evaluate the cash settlement payment at expiration, and identify which party makes the payment.

(b) Florida Exports expects to receive EUR 50 million three months from now and enters into a cash settlement currency forward to exchange these euros for U.S. dollars at USD 1.23 per euro. If the market exchange rate is USD 1.25 per euro at settlement, what is the amount of the payment to be received or paid by Florida Exports.

(d) BB will borrow in the US for 9%, while AA has to pay 10% to borrow in the US. AA will borrow in Australia for 7%, while BB has to pay 8% to borrow in Australia. BB will be doing business in Australia and needs AUD, while AA will be doing business in the US and needs USD. The exchange rate is 2AUD/USD. AA needs USD 1.0 million and BB needs AUD 2.0 million. They decide to borrow the funds locally and swap the borrowed funds, charging each other the rate the other party would have paid had they borrowed in the foreign market. The swap period is for five years. Determine the cash flows of the Swap.

(e) Bank A enters into a $1,000,000 quarterly-pay plain vanilla interest rate swap as the fixed rate payer at a fixed rate of 6% based on a 360-day year. The floating rate payer agrees to pay 90-day LIBOR plus a 1% margin; 90 day LIBOR is currently 4%. 90-day LIBOR rates are: 4.5% 90 days from now

5.0% 180 days from now
5.5% 270 days from now
6.0% 360 days from now

Calculate the amounts bank A pays or receives 360 days from now.