A money market investor wants to hedge her portfolio (that is worth M$10) against falling interest...
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A money market investor wants to hedge her portfolio (that is worth M$10) against falling interest rates by using 3x6 FRA contracts. The yield curve is upward sloping and the three- and six-month interest rates (p.a.) are as follows: 3M 5.50% 6M 5.625 % a) How should the money market investor act to hedge her portfolio? Calculate the fair contracted rate for 3x6 FRA. b) If the settlement rate after three months is 5% what are the consequences of the settlement? (Who owes who and how much?) A money market investor wants to hedge her portfolio (that is worth M$10) against falling interest rates by using 3x6 FRA contracts. The yield curve is upward sloping and the three- and six-month interest rates (p.a.) are as follows: 3M 5.50% 6M 5.625 % a) How should the money market investor act to hedge her portfolio? Calculate the fair contracted rate for 3x6 FRA. b) If the settlement rate after three months is 5% what are the consequences of the settlement? (Who owes who and how much?)
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To hedge her portfolio against falling interest rates using 3x6 FRA contracts the money market investor needs to enter into an FRA contract that allow... View the full answer
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
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