A corporate treasurer knows her company will need to borrow $130 million in 3 months time for 6 months. The treasurer is concerned that rates may rise, so she is considering buying a FRA. Current rates are given in the table:

Maturity (days) Rate (p.a.)

90 4.10%

180 4.55%

270 5.25%

360 5.60%

a) for a zero cost contract, the agreed upon rate specified by the FRA will be?

b) suppose in 6 months, all interest rates have increased by 2.5% (250 bp). The cash flows will be?

Answer rating: 100% (QA)

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