An appropriate position for a hedge

Assignment Help Financial Management
Reference no: EM13884994

In each of the following cases, indicate whether an interest rate cap, floor, collar, or reverse collar is an appropriate position for a hedge. Recommend a specific position.

a. A bank loan customer wants to borrow at a fixed 8 percent rate and the bank only lends at floating rates.

b. A bank has agreed to pay a large depositor a fixed 1.5 percent on balances over the next three years regardless of rate moves. The bank expects rates to fall on similar deposits over this period.

c. Your bank owns adjustable rate mortgages (ARMs) that are priced at three month LIBOR plus 1 percent. There is an annual cap on the allowable rate increase equal to a maximum of 1 percent a year. Thus, if LIBOR rises by 3 percent, the bank can raise the ARM rate just 1 percent. How can the bank effectively remove this cap?

Reference no: EM13884994

Questions Cloud

Seperate phosphoric acid from aqueous calcium chloride : What is the best solvent to seperate phosphoric acid from aqueous calcium chloride solution
Estimate a range for the four-firm concentration ratio : Estimate a range for the four-firm concentration ratio and the HHI for the game market in the United States based on the information provided in this news clip.
What is the relationship between soft and hard universalism : What is the relationship between soft and hard universalism? Which of the two doctrines you agree with the most and which of the two you feel applies to our current social environment the most
Describe research evaluation and why it is important : Describe research evaluation and why it is important
An appropriate position for a hedge : Your bank owns adjustable rate mortgages (ARMs) that are priced at three month LIBOR plus 1 percent. There is an annual cap on the allowable rate increase equal to a maximum of 1 percent a year. Thus, if LIBOR rises by 3 percent, the bank can raise t..
Choose any production process that might be of interest you : Choose any production process that might be of interest to you. Both merchan- dise and services are appropriate. As best you can, draw a value chain for this production process.
Why was the evacuation of the hospital so successful? : Why was the evacuation of the hospital so successful?
What key characteristics differentiate managerial capitalism : What key characteristics differentiate managerial capitalism or Fordism from Toyotism based on flexible manufacturing?
Why should a firm move beyond trading relationships : Suppose a firm's competitiveness was based on its proprietary knowledge, per- haps in the form of a patent on a product or process. What can you say about its considerations with regard to foreign market entry?

Reviews

Write a Review

Financial Management Questions & Answers

  Immediately undertake such project and issue new equity

Genoa ltd is about to start a new project that will have a Net Present Value of $100 million. The stock currently trades at $105 and there are 2,000,000 shares outstanding. In order to start the project the company needs to raise $400,000,000 in new ..

  What is Chriss annual percentage return and EAR

Chris invested $150,000 17 months ago. Currently the investment is worth $180,000. Chris knows that the investment paid interest monthly, but he does not know what yield on his investment. What is Chris's annual percentage return (APR) and EAR?

  Portfolio equally invested in a risk-free asset

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.05 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

  Raise capital by issuing new securities in secondary markets

Companies raise capital by issuing new securities in secondary markets. Preferred dividend payments are fixed amounts paid on a regular basis. Preferred stock with no fixed maturity can be valued using the present value of a perpetuity formula.

  Is there a difference between price and value

What is the right price for a stock? Is it book value, liquidation value or simply its market price at a given moment of time? Would you value a privately-owned company where there is no market value differently than a publicly owned company where th..

  Sum of the present values of expected cash flows

Which of the following would lower the sum of the present values of expected cash flows?

  What would the bond equivalent yield

You have a U.S. Treasury bill with 112 days to maturity quoted at a discount yield of 3.82 percent. Assume a $1 million face value. What would the bond equivalent yield?

  Motorist pay for fuel efficient six speed transmission

A new six speed automatic transmission for automobiles offers an estimated 4% improvement in fuel economy compared to traditional four speed transmissions. If a four speed transmission car averages 30 MPG and gasoline costs $4.00 per gallon, how much..

  How might inventory and accounts receivables be leveraged

375 - 4 dqs need to be answered today by 4pm est. on time work no plagarism 275 word count for each question. please

  Increased the importance of personal financial planning

There are at least three major areas that affect financial decisions. Life situations such as income, age, household size, and health. What are some of the social and economic factors that have increased the importance of personal financial planning ..

  Calculate answer to the nearest penny

You would like to have $43,440for the down payment on a house you plan to buy five years after you graduate. If your investments earn 3.3% APR compounded monthly, how much do you have to invest each month, starting next month, to meet your investment..

  Is it ethical for large firms to unilaterally lengthen

“Is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers? Why or Why not?”

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd