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A financial manager needs to hedge against a possible decrease in short-term interest rates. He decides to hedge his risk exposure by going short on
- A financial manager needs to hedge against a possible decrease in short-term interest rates. He decides to hedge his risk exposure by going short on an FRA that expires in 90 days and is based on 90-day Libor. The current term structure for Libor is as follows:
Term (Days) Interest Rate (%)
30 5.83
90 6
180 6.14
360 6.51
Identify the type of FRA used by the financial manager using the appropriate terminology and Calculate the rate the manager would receive on this FRA.
- It is now 30 days since the manager took a short position in the FRA. Interest rates have shifted down, and the new term structure for Libor is as follows:
Term (Days) Interest Rate (%)
60 5.5
150 5.62
Calculate the market value of this FRA based on a notional principal of $15,000,000.
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