Treasury and Risk Management

Running head: TREASURY AND RISK MANAGEMENT
Treasury and Risk Management
Name of the Student:
Name of the University:
Author’s Note:

TREASURY AND RISK MANAGEMENT1
Question 1
a) The Forward rate calculated via Interest Rate Parity is as follows:
Particulars Bid Offer
Avera
ge
Spot Rate 1.255 1.260 1.258
Forward Rate 1.230 1.245 1.238
Interest Rate in US 3.00%
Interest Rate in UK 5.00%
Forward Rate 1.2340
(Interest Rate
Parity)
The forward rate has been well calculated by taking the average spot rate and as shown below:
US Int Rate: 3% UK Int Rate: 5%
Forward Rate: Spot Rate: 1.258*(1+3%/1+5%)
Forward Rate: 1.2340
:b) The Arbitrage Method that can be well followed for the purpose of conducting Arbitrage the
steps that would be followed are as follows:
Investment Amount in £
£
100,000
Convert into USD 1.2575
Amount in USD
£
125,750
Invest in US 3.00%
Value After 3 Months
$
126,682.7
Convert the USD into £ £

TREASURY AND RISK MANAGEMENT2
102,369.86
Less: Pay Interest on £ 3.00%
Amount Borrowed
£
100,000
Interest Amount
£
750
Gross Amount Earned in
£
£
101,619.86
Less: Borrowed Amount
£
100,000.00
Net Amount Earned
£
1,619.86
c) The forward rates that are used in the Part A of the question is been well done on the basis of
Interest Rate Parity while on the other hand the forward rate that has been used is the 3 month
forward rate that has been well used for the purpose of calculation.
Question 2
a) If XX and YY has well agreed that the interest rate swap for the fixed rate would be P% (per
half year basis) against the LIBOR rate then the same is fair, this well means that the payment on
interest between XX and YY should be well equal, the cost savings would be as shown below.
Cost Saving occurs when parties take loan at a different rate from their borrowers that lead to
savings.
Company XX: Fixed Rate: 8%
Floating Rate: Libor (7%)+0.24% (Basis Point)+0.40%(Bid-Ask Spread): 7.64%.
Company Y: Fixed Rate: 6.6%
Floating Rate: Libor (7%)+0.20% (Basis Point)+0.60%(Bid-Ask Spread): 7.80%.