Forward rate agreement to hedge the interest rate risk

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Reference no: EM131297396

IP Phone, Inc. plans to borrow $80,000,000 for 6 months, three months from now. (In other words, the firm will be getting a 6-month loan in December.) The interest rate on the loan will be LIBOR + 0.75%, but the company is concerned about potential changes in LIBOR over the next 3 months. Currently, 3-month LIBOR is 0.895%, and 9-month LIBOR is 0.978%. Explain how the company can use a forward rate agreement (FRA) to hedge the interest rate risk. Calculate the forward rate for the FRA. What is the payment to or from the firm if 6-month LIBOR is 1.85% in December, and what is the net interest rate on the loan?

Reference no: EM131297396

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