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QUESTION 21 An investor purchases a forward rate agreement (FRA) with bank X, at the fixed rate of 10%, where the notional amount of this
QUESTION 21 An investor "purchases" a forward rate agreement (FRA) with bank X, at the fixed rate of 10%, where the notional amount of this contract is 20,000, and the cash flow according to the FRA contract will take place once, in one year later from now. Right now, it is end of year 0. The investor borrows 3,000 from bank Y now and will pay back, (from the end of year 1), the interest to bank Y at the (spot) interest rate at the end of each year until the maturity when is 20 years later from now. If the (spot) interest rate at the end of year 1 is 8%, then what will be the year-1 cash flow of the investor, taking into consideration of all transactions with bank X and bank Y? A. 160. B.-640 C. $400. D.-400. E. None of the others
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