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A money market investor wants to hedge her portfolio (that is worth M$10) against falling interest rates by using 3x6 FRA contracts. The yield

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A money market investor wants to hedge her portfolio (that is worth M$10) against falling interest rates by using 3x6 FRA contracts. The yield curve is upward sloping and the three- and six-month interest rates (p.a.) are as follows: 3M 5.50% 6M 5.625 % a) How should the money market investor act to hedge her portfolio? Calculate the fair contracted rate for 3x6 FRA. b) If the settlement rate after three months is 5% what are the consequences of the settlement? (Who owes who and how much?)

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