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08 CFA Level 2 - Mock Exam 1 (AM)模考试题 Q8 (part 1 - Part 6) [复制链接]

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Question 8 Chantal DuPont is the CFO of Vetements Verdun, a manufacturer of specialty clothing and uniforms, located in northern France. The firm is currently undergoing an expansion which will require DuPont to draw down 25 million on Vetements Verdun’s credit line as a 90-day bridge loan before the mortgage closes. The money will not be needed for 60 days, at which point the interest rate will be determined. The interest rate on the loan will be based off 90-day LIBOR. DuPont is becoming concerned because of signs that interest rates may begin to rise. The firm cannot afford to have its borrowing costs increase significantly over current rates. In response to DuPont’s concerns, the company’s CEO, Viviane Lamarre, has asked DuPont to hedge the firm’s borrowing costs, even if that entails some near-term outlays. DuPont and Lamarre discuss entering into a forward rate agreement (FRA) to hedge Vetements Verdun’s interest rate exposure on the credit line. Current LIBOR rates are:
[td=1,1,118 colSpan=2]        Libor rate
30-day 2.6%
60-day 2.8%
90-day 3.0%
120-day 3.2%
150-day 3.3%
180-day 3.4%
They decide to go forward with the hedge and DuPont enters into the appropriate FRA for the full amount of 25 million. In the first 30 days of the FRA, the fixed income markets rally sharply. The new set of LIBOR rates, on the thirtieth day of the FRA, is:
[td=1,1,118 colSpan=2]        Libor rate
30-day 2.2%
60-day 2.4%
90-day 3.6%
120-day 3.8%
150-day 3.8%
180-day 3.8%
At the settlement date, the interest savings on the loan term is 23,750. DuPont tells Lamarre, “I am looking forward to cashing our settlement check for 23,750.” Lamarre adds, “Yes, and on top of that we get to borrow for 90 days at a below-market rate.” Both DuPont and Lamarre are pleased with their decision to hedge. Part 1) Which statement most accurately describes a 2 x 3 forward rate agreement? A)   Two-month underlying interest rate on a contract settled in three months. B)   Contract expires in two months on an underlying loan settled in three months. C)   Underlying loan of two month maturity under a contract that expires in three months. D)   Three-month underlying interest rate on a contract expiring in three months. Part 2) Which forward rate agreement would most effectively hedge Vetements Verdun’s exposure to LIBOR? A)   3 x 2. B)   2 x 3. C)   2 x 5. D)   5 x 2. Part 3) Which value is closest to the price of the most effective hedge for Vetements Verdun? A)   3.0%. B)   3.3%. C)   3.6%. D)   2.8%. Part 4) What must the 90-day LIBOR rate have been at the expiration of the contract? A)   3.4%. B)   3.6%. C)   3.8%. D)   4.0%. Part 5) Regarding the statements made by Lamarre and DuPont about the ultimate value of their hedge: A)   Lamarre’s statement is incorrect; DuPont’s statement is incorrect. B)   Lamarre’s statement is correct; DuPont’s statement is correct. C)   Lamarre’s statement is correct; DuPont’s statement is incorrect. D)   Lamarre’s statement is incorrect; DuPont’s statement is correct. Part 6) Thirty days into the FRA, what is the value of the contract from Vetements Verdun’s perspective? A)   Owes 43,943. B)   Due 45,000. C)   Due 43,943. D)   Owes 45,000. Question 8 Chantal DuPont is the CFO of Vetements Verdun, a manufacturer of specialty clothing and uniforms, located in northern France. The firm is currently undergoing an expansion which will require DuPont to draw down 25 million on Vetements Verdun’s credit line as a 90-day bridge loan before the mortgage closes. The money will not be needed for 60 days, at which point the interest rate will be determined. The interest rate on the loan will be based off 90-day LIBOR. DuPont is becoming concerned because of signs that interest rates may begin to rise. The firm cannot afford to have its borrowing costs increase significantly over current rates. In response to DuPont’s concerns, the company’s CEO, Viviane Lamarre, has asked DuPont to hedge the firm’s borrowing costs, even if that entails some near-term outlays. DuPont and Lamarre discuss entering into a forward rate agreement (FRA) to hedge Vetements Verdun’s interest rate exposure on the credit line. Current LIBOR rates are:
[td=1,1,118 colSpan=2]        Libor rate
30-day 2.6%
60-day 2.8%
90-day 3.0%
120-day 3.2%
150-day 3.3%
180-day 3.4%
They decide to go forward with the hedge and DuPont enters into the appropriate FRA for the full amount of 25 million. In the first 30 days of the FRA, the fixed income markets rally sharply. The new set of LIBOR rates, on the thirtieth day of the FRA, is:
[td=1,1,118 colSpan=2]        Libor rate
30-day 2.2%
60-day 2.4%
90-day 3.6%
120-day 3.8%
150-day 3.8%
180-day 3.8%
At the settlement date, the interest savings on the loan term is 23,750. DuPont tells Lamarre, “I am looking forward to cashing our settlement check for 23,750.” Lamarre adds, “Yes, and on top of that we get to borrow for 90 days at a below-market rate.” Both DuPont and Lamarre are pleased with their decision to hedge. Part 1) Which statement most accurately describes a 2 x 3 forward rate agreement? A)   Two-month underlying interest rate on a contract settled in three months. B)   Contract expires in two months on an underlying loan settled in three months. C)   Underlying loan of two month maturity under a contract that expires in three months. D)   Three-month underlying interest rate on a contract expiring in three months. The correct answer was B) Contract expires in two months on an underlying loan settled in three months. A 2 x 3 forward rate agreement is a contract that expires in two months and the underlying loan is settled in three months. The underlying rate is a 30-day (1-month) rate on a 30-day (1-month) loan in 60 days (2 months). This question tested from Session 16, Reading 62, LOS c Part 2) Which forward rate agreement would most effectively hedge Vetements Verdun’s exposure to LIBOR? A)   3 x 2. B)   2 x 3. C)   2 x 5. D)   5 x 2. The correct answer was C) Vetements Verdun needs to be hedged against 90-day LIBOR rates that will prevail 60 days from now. Such a hedge would require a two-month contract on three-month rates, to be settled in five months: a 2 x 5. This question tested from Session 16, Reading 62, LOS c Part 3) Which value is closest to the price of the most effective hedge for Vetements Verdun? A)   3.0%. B)   3.3%. C)   3.6%. D)   2.8%. The correct answer was C) The actual, unannualized rate on the 60-day loan is: R60 = 0.028 × 60/360 = 0.00467 The actual, unannualized rate on the 150-day loan is: R150 = 0.033 × 150/360 = 0.01375 So the rate on a 90-day loan to be made 60 days from now is: FR (60,90) = ((1 + R150)/(1 + R60)) − 1
FR (60,90) = (1.01375/1.00467) − 1
FR (60,90) = 1.00904 − 1
FR (60,90) = 0.904%
We annualize this rate using the formula: 0.904% × (360/90) = 3.62% This question tested from Session 16, Reading 62, LOS c Part 4) What must the 90-day LIBOR rate have been at the expiration of the contract? A)   3.4%. B)   3.6%. C)   3.8%. D)   4.0%. The correct answer was D) 4.0%. Since Vetements Verdun is long the FRA, the market rate of interest at settlement must be higher than the price of the contract and the 23,750 has a positive value. The interest savings at the end of the loan term will be: Interest savings = ( (market rate × (90/360)) − (0.0362 × (90/360)) ) × 25,000,000
23,750 = ((market rate × 90/360) − 0.00905) × 25,000,000
0.000950 = market rate × 90/360 − 0.00905
0.0100 = market rate × 0.25
0.0400 = market rate The market rate must have been 4.0%. This question tested from Session 16, Reading 62, LOS c Part 5) Regarding the statements made by Lamarre and DuPont about the ultimate value of their hedge: A)   Lamarre’s statement is incorrect; DuPont’s statement is incorrect. B)   Lamarre’s statement is correct; DuPont’s statement is correct. C)   Lamarre’s statement is correct; DuPont’s statement is incorrect. D)   Lamarre’s statement is incorrect; DuPont’s statement is correct. The correct answer was A) Lamarre’s statement is incorrect; DuPont’s statement is incorrect. The interest savings at the end of the loan term must be discounted back to the present value on the FRA settlement date: Settlement payment = Present value of interest savings
Settlement payment = 23,750 / (1 + (0.040 × 90/360))
Settlement payment = 23,750 / (1 + 0.010)
Settlement payment = 23,750 / 1.010
Settlement payment = 23,515
The settlement check would be for 23,515. DuPont’s statement is incorrect. Lamarre’s statement is also incorrect because the settlement check represents the value of the below-market loan. The actual loan will be at the prevailing rate, and the settlement on the FRA will offset the interest cost on the loan. This question tested from Session 16, Reading 62, LOS c Part 6) Thirty days into the FRA, what is the value of the contract from Vetements Verdun’s perspective? A)   Owes 43,943. B)   Due 45,000. C)   Due 43,943. D)   Owes 45,000. The correct answer was C)
Due 43,943. Since we have moved 30 days into the FRA, the new rate for the end of the contract is the 30-day rate (60 days originally minus 30 days passed) and the new rate for the settlement of the loan is the 120-day rate (150 days originally minus 30 days passed). With that information, the pricing is straightforward: The actual, unannualized rate on the 30-day loan is: R30 = 0.022 × 30/360 = 0.00183 The actual, unannualized rate on the 120-day loan is: R120 = 0.038 × 120/360 = 0.01267 The rate on a 90-day loan to be made 30 days from now is: FR (30,90) = ((1 + R120) / (1 + R30)) − 1
FR (30,90) = ((1 + 0.01267) / (1 + 0.00183)) − 1
FR (30,90) = (1.01267 / 1.00183) − 1
FR (30,90) = 1.010820 − 1
FR (30,90) = 1.0820%
We annualize this rate using the formula: 1.082% × (360/90) = 4.33% The interest saving is: Interest saving = ( (0.0433 × 90/360) − (0.0362 × 90/360) ) × 25,000,000
Interest saving = (0.01083 − 0.00905) × 25,000,000
Interest saving = 0.00178 × 25,000,000
Interest saving = 44,500
The interest “saving” is a positive 44,500. Discounting that back at the current 120-day rate we have: FRA value = 44,500 / (1 + ( 0.038 × 120/360) )
FRA value = 44,500 / (1 + ( 0.012667) )
FRA value = 44,500 / 1.012667
FRA value = 43,943
The value of the FRA to Vetements Verdun 30 days into the contract is 43,943. In other words, they are due 43,943.
还记得年轻时的梦啊
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