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You are the treasurer of a firm that will need to borrow $10 million at LIBOR plus 2.5 points in 45 days.

The loan will have a maturity of 180 days, at which time all the interest and principal will be repaid. The interest will be determined by LIBOR on the day the loan is taken out.

To hedge the uncertainty of this future rate, you purchase a call on LIBOR with a strike of 9 percent for a premium of $32,000.

Determine the amount you will pay back and the annualized cost of borrowing for LIBORs of 6 percent and 12 percent.

Assume the payoff is based on 180 days and a 360-day year. The current LIBOR is 9 percent.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91904510

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