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How to calculate the hedge ratio? [20 points] An FRA market maker sells a EUR 100 million 3v6 FRA at a rate of 7.52%. He
How to calculate the hedge ratio?
[20 points] An FRA market maker sells a EUR 100 million 3v6 FRA at a rate of 7.52%. He is exposed to the risk that interest rates will have risen by the FRA settlement date in three months' time. The dealer needs to calculate a hedge ratio. Assume 30/360, that is, 90/360 for 3 months. a. [5 points] If interest rate for the FRA period rises by 1bp (basis point), calculate the loss to the dealer, discounting back to the spot day. c. [5 points] Given the following specification for the Three Month Euro (Euribor) Future Calculate the hedge ratio. Show your expressionStep by Step Solution
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