Question: AlphaBeta Ltd purchased a 3X6 FRA that will commence in 3 months' time. The quoted FRA rate is 3% per annum. FRAs are settled against

AlphaBeta Ltd purchased a 3X6 FRA that will commence in 3 months' time. The quoted FRA rate is 3% per annum. FRAs are settled against LIBOR. All interest rates are discretely compounded using quarterly compounding. Immediately after AlphaBeta entered the FRA, the yield curve shifts and the FRA rate quoted for the same period is now 2.7%

Which of the following statements is true?

Select one:

A. When AlphaBeta enters the FRA and before interest rates shift down the value of the FRA is zero.

B. After interest rates shift down to 2.7% the value of the FRA to AlphaBeta is positive.

C. After interest rates shift down to 2.7% the value of the FRA to AlphaBeta is negative.

D. It is impossible to determine whether the value of the FRA to AlphaBeta is positive or negative without knowing the whole term structure of interest rates.

E. Both A. and B. are true

F. Both A. and C. are true

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