On March 15th, a bank buys a 36 FRA on a notional principal of $100 million at
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Question:
On March 15th, a bank buys a 3×6 FRA on a notional principal of $100 million at the agreed forward interest rate of 4.7%. Two months later on May 15th, because of a change in circumstances, the bank has to neutralize this long FRA.
a. Explain how the long 3×6 FRA negotiated on March 15th can be neutralized on May 15th.
b. On May 15th, the following spot interest rates are recorded:
Maturity Rate:
1 months 3.8%
2 months 4.0%
3 months 4.2%
4 months 4.4%
5 months 4.6%
Determine how much the bank gains (losses) by neutralizing the FRA on May 15th. Make clear any assumptions that are made in your evaluation.
Related Book For
Introduction to Derivatives and Risk Management
ISBN: 978-1305104969
10th edition
Authors: Don M. Chance
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