Question: Assume that you want to speculate on how six month
Assume that you want to speculate on how six month cash market LIBOR now equal to 1.95% will move over the next year. You believe that consensus forecasts of future rates are too high. You can enter into an FRA and agree either to pay 2.25 percent and receive six month LIBOR, or pay six month LIBOR and receive 2.25 percent for delivery in one year. Explain which position you would take and why you expect to profit.
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