firm a borrows $10 million for 12 months, with floating rate
Firm A borrows $10 million for 12 months, with floating rate interest referenced to 3 month AUD libor, and paid quarterly. For the premium of 0.20% p.a., Firm A can purchase a cap with a strike rate of 8% p.a. Libor at the start of each quarter was 8.8%, 8.3%, 8.0% and 7.6% respectively. Firm A uses a cap to conduct a borrowing hedge.
Compute the net cash flows for today and at the end of the 4 quarters
Compute the effective borrowing rate with the cap.
Compute the effective borrowing rate without the cap.