8. Suppose that in order to hedge interest rate risk on your borrowing, you enter into an...

Question:

8. Suppose that in order to hedge interest rate risk on your borrowing, you enter into an FRAthat will guarantee a 6%effective annual interest rate for 1 year on $500,000.00.

On the date you borrow the $500,000.00, the actual interest rate is 5%. Determine the dollar settlement of the FRA assuming

a. Settlement occurs on the date the loan is initiated.

b. Settlement occurs on the date the loan is repaid.

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