You will be taking out a 3-month loan of 200,000 in 5 months' time. You wish to
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Question:
- You will be taking out a 3-month loan of 200,000 in 5 months' time. You wish to hedge against changes in the interest rate by entering an FRA. The 5-month libor rate is 4% and the 8-month libor rate is 5%. There are 151 days in the first 5-month period, and 92 days in the subsequent 3-month period.
- (a) What is the price of the FRA?
- (b) What is the present value of the FRA at inception?
- (c) Assume that 2 months (59 days) have elpased and the 3-month and 6-month Libor rates are, respectively, 3% and 4%. What is the current value of the FRA?
- (d) The bank with which you have set up the FRA allows you to exit your position by entering into an opposite FRA. Based on your answer to part (c), discuss wether or not you would want to exit the FRA.
Related Book For
Advanced Accounting
ISBN: 978-1934319307
2nd edition
Authors: Susan S. Hamlen, Ronald J. Huefner, James A. Largay III
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