Wells Fargo believes that LIBOR rates will increase, and Bank of America believes LIBOR rates will decrease.
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Question:
Wells Fargo believes that LIBOR rates will increase, and Bank of America believes LIBOR rates will decrease. Which bank should buy and sell an FRA?
They set an agreement rate at 3.3% for three-month LIBOR. The settlement date will occur in seven months. The notional amount is $35,000,000. Assume every month has 30 days. If the settlement rate ends up at 4.5%, what has the winner earned (remember an FRA is settled not at the end of the contract period of the FRA, but when the settlement rate is determined)?
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