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Suppose that you enter into an FRA that is designed to ensure you will receive a fixed rate of 5% on a principal of $100
Suppose that you enter into an FRA that is designed to ensure you will receive a fixed rate of 5% on a principal of $100 million for a six-month period starting in two years. If three-month LIBOR proves to be 5.5% for the six-month period, what is the cash flow that is settled at the two-year point? Would this be a cash inflow or an outflow to you at the two-year point?
*note: all interest rates here are expressed with semi-annual compounding
| -$243,309; cash outflow | ||
| -$250,000; cash outflow | ||
| $250,000; cash inflow | ||
| $243,309; cash inflow |
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