Bank B has 100 million variablerate loan in its assets portf

Bank B has $100 million variable-rate loan in its assets portfolio with coupon of LIBOR+2%; the LIBOR rate is to be reset in the next three month. The revenue is exposed to interest rate risk. Bank B wishes to manage its exposure by selling 3x6 FRA with notional principal of $100 million, where it pays LIBOR, and receives 2.45 percent. What is the net payoff for this bank in the next three months? 1) Net receipt of $1,112,500 2) Net payment of $1,125,000 3) Net receipt of $625,000 4) Net receipt of $2,125,000

Solution

net receipt for the bank = (LIBOR + 2.45% - LIBOR + 2%)/4 = 4.45%/4

net receipt in dollars = 100,000,000 * 4.45%/4 = 1,112,500