# Question: Suppose that in order to hedge interest rate risk on

Suppose that in order to hedge interest rate risk on your borrowing, you enter into an FRAthat will guarantee a 6%effective annual interest rate for 1 year on $500,000.00.

On the date you borrow the $500,000.00, the actual interest rate is 5%. Determine the dollar settlement of the FRA assuming

a. Settlement occurs on the date the loan is initiated.

b. Settlement occurs on the date the loan is repaid.

On the date you borrow the $500,000.00, the actual interest rate is 5%. Determine the dollar settlement of the FRA assuming

a. Settlement occurs on the date the loan is initiated.

b. Settlement occurs on the date the loan is repaid.

## Answer to relevant Questions

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