Question

Star Industries estimates that they would have a surplus of Rs 500 lakhs after 6 months to be invested for 6 months thereafter. Commerce Bank (CB) are bankers to the firm and have been accepting deposits at MIBOR. With current MIBOR at 9%, the investment returns are 9%. The interest rates are expected to fall in the next 6 months. Star Ind. buys a MIBOR based 6/12 FRA from another bank Forward Bank (FB). The quote received reads as follows: 6/12 FRA 8.75% - 9.25% for notional principal of Rs 500 lakh. What is the FRA deal that Star Ind. will enter into with FB? Interpret the quote received by Star Ind. What is the rate that will be applicable in this case? Find out the cash flows and effective return if MIBOR rises to 10%.Use annual compounding. Find out the cash flows and effective return if MIBOR falls to 8.10%, use annual compounding?

Answer 1

Answer:

This question is too big.