A financial manager needs to hedge against a possible decrease in short term interest rate. He decides
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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 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.
Related Book For
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
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