Couple more questions if anyone would be so kind (16.4) why is the comment about indirect investing in stocks for commodity exposure incorrect? (16.5) i should probably know this one but cant figure it out off top of my head…wiht the prices of 55, 54, 52, 51…where do they get ~53 from?? (rf = 2%) (17.4) If you already issued $5MM in fixed rate debt (ie. making fixed payments), why on earth would you enter a “pay swap” under the assumption/expectation that interest rates will fall? If anything, you would want to pay floating not fixed…? (18.4) Stupid $7,500…i get the $7,500 is easy, but can’t manage to figure out how they come up with $7,183 discounted back. At most, should we not be discounting back at the rf rate for 3 months. This question was asking the PV of credit risk given an “in the money” FRA. please help!

discount $7,500 back for the full period of the loan at the market rate and then discount back again the 2 or 3 months at the risk free rate.

worked like a charm. thanks pj

My understanding is: 16.4 - the text says this is an ‘efficient and effective’ method, but this would not be case if the company hedges their interest rate exposure. 16.5 if you work out the 4 discount factors using 2% and input into the swap price calculation it does come out at around 53. 17.4 Schweiser explantion says that it should be a pay floating not fixed. Their ‘correct’ seems to refer only to the size of the notional.

Sorry 16.4 - I shoud have said ‘hedges commodity exposure’…

almost missed your response. thanks a lot damo.