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Suppose that you have a friend who is always willing to lend you money for 3 months at an interest rate of 3-month LIBOR +

  • Suppose that you have a friend who is always willing to lend you money for 3 months at an interest rate of 3-month LIBOR + 125 bps. It turns out that starting on 5/24/2020 you are going to need to borrow $10,000 for a big expense. Being prudent, you look at an FRA market to see if you can use one to effectively borrow this at a fixed rate. 


  • a.  What kind of FRA would you need? In other words, if you were to describe the relevant FRA as “t 1 vt 2 ” What are t 1 and t 2 ?
  • b. Are you going to go long or short this FRA?
  • c. What is the quoted rate you can get currently for the position you describe in (b)?
  • d. What is your effective fixed rate when combining this FRA with a loan from your friend?
  • e. What is the notional value of the FRA you want?
  • f. Suppose that at maturity, the relevant market rate is 2.8%. What will be the cash settlement of your FRA contract?

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