Question

Can anyone answer the question and explain it thx alot

The following statement is to be used in answering questions 29 and 30. Company X, a low-rated firm, desires a fixed-rate, long-term loan. X presently has access to floating interest rate funds at a margin of 1.25% over LIBOR. Its direct borrowing cost is 11% in the fixed-rate bond market. In contrast, company Y, which prefers a floating-rate loan, has access to fixed-rate funds in the Eurodollar bond market at 9% and floating-rate funds at LIBOR + 1/4%. Suppose they split the cost savings. 29. How much would X pay for its fixed-rate funds? a) 9.5% b) 10.0% c) 10.5% d) 10.75% 8 30. How much would Y pay for its floating-rate funds? a) LIBOR -.25% b) LIBOR -.50% c) LIBOR d) LIBOR + .5% 31. In the currency futures market, what is the term that describes the number of contracts in a currency outstanding at any one time? a) open interest b) closed interest c) long position d) in-the-money

Answer 1

Ans 29 Option C 10.5%

Explanation

Option 1 Parties directly lock in the desired rates
Company	Nature	Rate
X	Fixed Rate	11%
Y	Floating rate	LIBOR+0.25 %
Total            A		11% +LIBOR+0.25%
Option 1 Parties indirectly lock in the desired rates by swapping
Company	Nature	Rate
Y	Fixed Rate	9%
X	Floating rate	LIBOR+1.25 %
Total             B		9% +LIBOR+1.25%
Net Savings assuming no swap dealer is involved A-B	(11% +LIBOR+0.25%-9% +LIBOR+1.25%)	1%
Savings split in the ratio of 50:50
X Savings	A	0.50%
X Original market Fixed Rate	B	11%
Net Fixed rate Available to X	B-A	10.500%

Ans 30 Option A LIBOR-.25%

Explanation

Savings split in the ratio of 50:50
Y Savings	A	0.50%
y Original market Floating Rate	B	LIBOR+0.25 %
Net Floating Rate Available to Y	B-A	LIBOR-0.25 %

Ans 31 Option A

Open Interest describes the number of outstanding contract in Currency derivative market.

Ans 32 Option D

   All of the Above

Ans 33 Option A

Bankers

Speculators , Hedgers and Arbitrageurs are market participants whereas the Banks acts as dealers and always a counter party to the forward contracts except for currency futures which are standardized instruments traded in exchanges,

Ans 34 Option B

Premium of 3.5%

Explanation

	In $
Euro Spot rate	1.4757
Euro 30 days Forward	1.48
(Forward Price-Spot Price)/Spot Price *12	3.50%

Ans 35. Option d

Using Local Financing