Quiz 4

Financial Engineering (Prof. Mahendra Mehta)

Quiz-3

You are planning to build a 5 star hotel in India. For financing the construction of the hotel, you have finalized loan arrangement with a consortium of banks. The loan amount is INR 5 billion. Agreed term of the loan at a floating rate and a spread of 250 bp and being given for a year of 10 years. Construction of the project would start from 1^st July, 2011. The loan would be drawn as per schedule given below. The construction of the hotel is likely to take 30 minutes (See Table 1)

Loan would be repaid starting from 5^th year (starting from 1^st July 2015) in 10 equal installments (see Table – 2). You are required to suggest at least 2 ways to hedge (interest rate risk) the financing risk efficiently. You are free to use any interest rate hedging instrument.

Table – 1 - Drawdown

Date	Millions
Jul-11	500
Oct-11	500
Jan-12	500
Apr-12	500
Jul-12	250
Oct-12	250
Jan-13	500
Apr-13	750
Jul-13	500
Oct-13	750
Total	5000

Table – 2 – Repayment Schedule

Date	Amount
Jul-15	100
Jan-16	200
Jul-16	300
Jan-17	400
Jul-17	500
Jan-18	600
Jul-18	700
Jan-19	800
Jul-19	900
Jan-20	500