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.
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.