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Hi John,
For part c of this question where they ask the outcomes of each hedge if LIBOR fell by 0.5 I don’t understand the calculation for the amount the company has to pay to the bank:
7.1m*(3.5%-2.45%)*(4/12)* (1/1+(3.5%*4/12))= GBP1,169.65
The bit I don’t understand is why have have to multiply by (1/1+(3.5%*4/12)). what is that for?
Thank you,
It is a very minor point (but strictly it is correct) it is to discount the payment for 4 months at 3.5%
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