Consider the following conversation: John: I'm looking to buy $25 million notional 9 x 12 FRA. The

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Consider the following conversation:

John: "I'm looking to buy $25 million notional 9 x 12 FRA. The FRA rate is currently at 4%, and I'm sure the forward rates will rise."

Sally: "You could trade ED Futures instead."

John: "Yes, I suppose I could, but they are exactly the same anyway. I like FRAs since I can by them from my friend at RBC." There are several things about this conversation we can explore.

(a) What explicit trade in the ED futures market would accomplish what John wants?

(b) Is John correct that these trades are identical? If not, in what ways are they different?

Related Book For answer-question

Income Tax Fundamentals 2013

ISBN: 9781285586618

31st Edition

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill

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Posted Date: Jun 15, 2023 02:13 AM

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Consider the following conversation: John: I'm looking to buy $25 million notional 9 x 12 FRA. The

Question:

Expert Answer:

a To replicate the payoff of a 9 x 12 FRA John could enter into the following ED Futures trade Sell short a 3month Eurodollar Futures contract expirin... View the full answer

Income Tax Fundamentals 2013

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