Question: A financial manager needs to hedge against a possible decrease in short term interest rate. He decides to hedge his risk exposure by going short

A financial manager needs to hedge against a possible decrease in short term interest rate. He decides to

hedge his risk exposure by going short on an FRA that expires in 90 days and is based on a 180-day

LIBOR. The FRA rate offered is 6.37%.

Now 44 days later, interest rates have shifted down and the LIBOR structure is as follows:

Term Interest rate

(90-44) day 5.3%

(180-44) day 5.60%

(270-44) day 5.84%

(360-44) day 6.48%

Calculate the market value of this FRA based on a notional principal of $60 million.


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