Question 3 TJA Corp. is anticipating a need to borrow $10 million in three months’ time for a period of six months. Its

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Question 3
TJA Corp. is anticipating a need to borrow $10 million in three
months’ time for a period of six months. Its banker, Bank of
America has agreed to provide a 6-month, $10 million loan at
LIBOR+0.5%. The 6-month LIBOR is now quoted at 3% pa.
Required
A. What target interest rates can TJA lock in using an FRA?
Describe the hedging strategy that the company would follow. [10
marks]
B. Show that the target interest rate locked in by the company is
the same, irrespective of whether the 6-month LIBOR rate at
expiration is 4% or 2%. Assume a counterparty and be specific about
the terms.