Hedged with forward contract

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Reference no: EM133578667

Question

Now assume EMFC had entered into a forward contract with say Fannie Mae or Freddie Mac to deliver 60 days from origination (60 days from closing), the four mortgages with a total of $2 million in principal, each loan amortized over 25 years with contract rate of 7.0%, a term of 11 years, in exchange for $2 million from either of the two agencies. Assume market interest rate decreased to 6.5% after the loan commitments were issued by EMFC and because of fallout only three of the loans closed (75% closure rate). Fallen out means one of the borrowers chose not to borrow from this lender but borrow from another lender since market interest rate has declined. Calculate the loss incurred by EMFC even though it has hedged with a forward contract.

Reference no: EM133578667

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