Question 1a 2016

Part (1) Petra is a hedge fund manager who has $50m invested on a floating interest rate basis benchmarked to LIBOR. She wants to fix a reinvestment rate in 90 days for a three-month period. Today she is quoted a 3 x 3 Forward Rate Agreement (FRA) rate of 5.85/5.8 and decides to enter into a FRA agreement. After 90 days, at the reset period for her investment, LIBOR is 5%. a) What is the settlement value on the FRA? (4 marks) FRA pay-off = Notional principal (Underlying rate at expiration Forward contract rate)x Days in underlying rate day count base Days in underlying rate 1 + Underlying rate at expiration day count base b) Show the exact cash flows of the investor and explain whether or not she would match the cash flows on her underlying investment position as she planned at the outset when she entered into the FRA agreement. (4 marks) Part (1) Petra is a hedge fund manager who has $50m invested on a floating interest rate basis benchmarked to LIBOR. She wants to fix a reinvestment rate in 90 days for a three-month period. Today she is quoted a 3 x 3 Forward Rate Agreement (FRA) rate of 5.85/5.8 and decides to enter into a FRA agreement. After 90 days, at the reset period for her investment, LIBOR is 5%. a) What is the settlement value on the FRA? (4 marks) FRA pay-off = Notional principal (Underlying rate at expiration Forward contract rate)x Days in underlying rate day count base Days in underlying rate 1 + Underlying rate at expiration day count base b) Show the exact cash flows of the investor and explain whether or not she would match the cash flows on her underlying investment position as she planned at the outset when she entered into the FRA agreement. (4 marks)