Question

A firm will need to take out a $4,400,000 loan 60 days from now for a 180-day interval. It purchases a call with X=4.5%. The call expires in 60 days and the underlying is a 180-day corporate loan rate.

What will be the call payoff in 240 days, if the 180-day spot rate in 60 days is 7.7%?

Round your answer to the nearest integer

Answer 1

Solution:

Loan Amount : $4,400,000 to be taken 60 days from now,

Loan Duration : 180 days & Call Rate = 4.5% & Spot Rate : 7.7%

Now 60 days <----180 days ---->     240 days

^----------------------------^-------------------------------------------------------------^

Call Payoff in 240 days will be calculated form 60 days from now; i.e 180 days

Call Payoff : $ 4,400,000 * ( 7.7% - 4.5% ) * 180/360

Call Payoff : $ 4,400,000 * ( 3.2% ) * 180/360

Call Payoff : $ 70,400