Need some help with this -- anyone able to be of some assistance?
Today (March 29, 2011), Old Navy anticipates needing a three month $110 million bank loan on October 1, 2011 to finance a new inventory of Holiday Season clothes for fall/winter of 2011. The bank loan will be based on the three month LIBOR rate plus an additional 3% as of October 1, 2011. The October 2011 three month Euro dollar futures contract is trading at 95.500 on March 29, 2011. The October three month Euro dollar futures contract trades at 92.000 on October 1, 2011.
A. List the actions Old Navy will take between March 29, 2011 and October 1, 2011 to hedge the interest rate on the $110 million loan.
B. What are the total gains/losses on the Euro dollar futures?
C. What is the net interest rate (including futures gains/losses) of the hedged bank loan?
D. What was Old Navy’s opportunity cost/savings from hedging (how much extra money did Old Navy pay out or save by hedging the loan rather than doing nothing)?
Today (March 29, 2011), Old Navy anticipates needing a three month $110 million bank loan on October 1, 2011 to finance a new inventory of Holiday Season clothes for fall/winter of 2011. The bank loan will be based on the three month LIBOR rate plus an additional 3% as of October 1, 2011. The October 2011 three month Euro dollar futures contract is trading at 95.500 on March 29, 2011. The October three month Euro dollar futures contract trades at 92.000 on October 1, 2011.
A. List the actions Old Navy will take between March 29, 2011 and October 1, 2011 to hedge the interest rate on the $110 million loan.
B. What are the total gains/losses on the Euro dollar futures?
C. What is the net interest rate (including futures gains/losses) of the hedged bank loan?
D. What was Old Navy’s opportunity cost/savings from hedging (how much extra money did Old Navy pay out or save by hedging the loan rather than doing nothing)?